The bullish thesis on Roku (NASDAQ:ROKU) should be pretty obvious at this point. However, the market has been getting jittery the past few weeks due to macroeconomic and political concerns. This uncertainty has helped the bears to come out of the woods and put further downward pressure on ROKU stock.
ROKU stock has been on a downtrend since August this year. I don’t expect that to change in the short term. However, I still remain confident in ROKU stock for the long term.
Downgrades Have Battered ROKU Stock
Despite being a previous Wall Street darling, ROKU stock was hit with a series of downgrades. Downgrades led to downward pressure. The latest analyst to issue a downgrade was MoffettNathanson’s Michael Nathanson.
He downgraded ROKU stock to sell from neutral and cut his price target by a third. The firm has a price target on ROKU stock of $220, which was about the share price before Wednesday’s 18.2% surge. That came in reaction to news that its long-running dispute with YouTube had been settled.
Nathanson quipped “Simply put, we think our and the Street’s long-term revenue and earnings estimates are just too damn high,”
Accordingly, he argues that rising competitive pressures from TV manufacturers could potentially crowd out Roku’s operating system. Roku is highly dependent on the ability to monetize its large user base with ad-based video-on-demand.
I think Nathanson’s concern is a little misplaced. Roku’s platform has become the dominant force in curating streaming content. The much-larger Amazon (NASDAQ:AMZN) failed to displace Roku with its Firestick product. So it’s laughable that a TV OEM could do the same. Any TV manufacturer that attempts to do so will be quickly shut out. We have already seen how a conflict against Roku goes. You can ask management at AT&T (NYSE:T) how well that conflict went for them and HBO Max.
On average most analysts still are bullish on Roku. According to FactSet, ROKU stock has 21 “buy” ratings against four “hold” ratings and three “sells.” The average price target is $387.96.
Roku Has Reached Number One in Mexico
The international market is a potential area of growth for Roku. Streaming services are becoming more widely available in many countries. Therefore it makes sense to have a platform like Roku to manage and consolidate these services. Given that Roku already has a strong lead in the U.S. and Canada, I believe that it has a pretty good shot of attaining the same success in other countries.
We are seeing this thesis play out in the company’s expansion to Mexico. The company recently announced that it became the number one streaming platform in the country, based on hours streamed. The survey was conducted by the Hypothesis Group with 2,534 respondents.
The study also shows that consumers in Mexico view Roku as “the best streaming platform for free TV shows and movies.” This means that Roku is able to attract eyeballs independent of the large streaming platforms.
Roku is also solidifying this lead by launching new products and building partnerships. New products like the company’s recently launched 4K Streaming Stick will continue to win over customers. The Streaming Stick 4K offers smooth streaming service in 4K, Dolby Vision, and HDR10+ picture. The company also has eight Roku TV brand partners in Mexico. These TV companies embed Roku’s operating system on their smart TVs giving the company an easy distribution channel.
Most platforms operate on a “winner-takes-most” business model. In other words, the profitability and success usually only accrue to a handful of players in the industry. Thus it is crucial to see Roku “win” in these markets and dominate market share. Once the company’s place is secure, it should be easy enough to monetize this user base.
The Verdict on ROKU stock
Given the current market sentiment, ROKU stock may not immediately rebound in the short term. But given the company’s strong management team, I believe it is only a matter of time before the selling pressure subsidizes. Roku is a dominant force in the streaming industry and a fantastic long-term investment.
On the date of publication, Joseph Nograles held a LONG position in ROKU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.
