Roku (NASDAQ:ROKU) stock just received a double upgrade from Bank of America, which sent shares as high as $73.45 this morning. As of this writing, shares have settled back down, now trading lower by more than 2%.
Why did ROKU stock get an upgrade? Bank of America sees ad spending improving later this year. This comes after ad spending fell last year as companies anticipated a recession that has yet to arrive. Tripadvisor (NASDAQ:TRIP) got the same bullish treatment from Bank of America last week.
Roku opened this morning, Feb. 17, at about $73 per share with a market capitalization of nearly $10 billion. In early 2021, its pandemic-era high was about $470 per share.
ROKU Stock: An Advertising Comeback
The Bank of America ROKU stock upgrade also comes after Roku beat expectations for the fourth quarter, although the company still lost $237 million, or $1.70 per share. Roku also saw $3.1 billion in revenue during 2022, a 13% increase year-over-year (YOY). According to the results, more than 80% of revenue came from Roku’s platform while the rest came from product sales.
Roku sells streaming sticks and TVs, but it also re-sells streaming services and offers its own free streaming service, the Roku Channel. In its earnings call, the company said its future lies in ads. Device sales fell 18% YOY in Q4.
Rising marketing costs have been keeping Roku from showing a positive bottom line. For the current quarter, the company projects $700 million in revenue, “total gross profit of roughly $310 million, and adjusted EBITDA of negative $110 million.” Roku now has 70 million customers — mostly in the U.S. — and is currently focused on “improvements in content discovery and engagement.”
Roku’s value is based on it being a gatekeeper for services from Warner Bros. Discovery (NYSE:WBD), Paramount (NASDAQ:PARA), Netflix (NASDAQ:NFLX), Disney (NYSE:DIS) and other streamers. At its current price, Roku has about two-thirds the value of Paramount, which owns CBS, Showtime and the Paramount movie studio. At one point during its 2021 highs, however, Roku was worth nearly three times Paramount.
Speculation in its heyday centered around Roku being bought, but founder and CEO Anthony Wood controls much of the voting stock. Wood has shown no intent to sell.
What Happens Next?
Roku is now a mature company. Its fourth quarter stood out mainly because expectations were low.
Now, Roku needs to show both growth and profit to justify its valuation.
On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.