The U.S. media advertising market is now rebounding as the fears of a recession fade, while the streaming wars are heating up, and Roku appeared to benefit from these trends in the second quarter. This has put the spotlight on companies like ROKU stock.
Further, the valuation of Roku (NASDAQ:ROKU) stock is now quite low, and the company remains the runaway leader in the U.S. when it comes to providing an operating system for streaming TV. Given all of these points, I believe that ROKU stock is indeed poised to mount a comeback in the near-to-medium term.
Macro Trends Should Be Positive for Roku
As I noted in a previous column, “according to Ad Age, (U.S.) ad revenue is expected to climb a healthy 5% this year” and another 8.1% in 2024.
This rapidly growing ad market should enable Roku’s growth to accelerate going forward. And already in the second quarter, the company’s Platform revenue, which consists mostly of its ad sales, jumped 11% versus the same period a year earlier, while Roku reported that “We have begun to see some ad verticals improve.” Also importantly, the firm stated that it was “well positioned to re-accelerate growth as the ad market recovers.”
Further, almost 30% of U.S. households have gotten rid of one or more streaming services, while very large companies such as Disney (NYSE:DIS), Netflix (NASDAQ:NFLX), and Warner Bros (NASDAQ:WBD) continue to invest huge amounts in their streaming services and rely on them as integral parts of their business models.
Given these points, these firms are likely to spend a great deal on promoting and marketing their streaming services, and advertising on Roku is a great way to accomplish those goals.
The Runaway Market Leader and a Low Valuation
As of July 2023, Roku was not only the leader in the U.S. streaming TV operating system market, but its “TV unit share was larger than the next three largest TV operating systems combined,” the company reported, citing Circana, an independent research firm.
What’s more, Roku expects its market share to continue to increase going forward, while the cord-cutting trend is ongoing in the U.S. and other countries, causing the size of Roku’s total addressable market to continue to climb.
Also noteworthy is that “while 45% of U.S. adults’ entertainment is provided by streaming services, U.S. companies only spend 18% of their ad budgets on streaming,” Seeking Alpha columnist Gary Alexander cites Roku as reporting. Over time, the proportion of ad dollars spent on streaming should climb much closer to the percentage of time that Americans spend on the technology. Roku, of course, should benefit significantly from the latter trend.
Another trend that should boost Roku’s ad revenue is the continuously increasing viewership of its Roku Channel whose audience is now roughly the same size as heavy hitters such as Comcast’s (NASDAQ:CMCSA) Peacock Channel and WBD’s HBO Max.
On the valuation front, ROKU stock is changing hands at a rather undemanding forward price-sales ratio of just 2.5 times. Since analysts, on average, expect the company’s top line to climb 13.55 next year, that’s actually a rather low valuation.
Oppenheimer, Other Analysts Are Upbeat on ROKU Stock
In the wake of Roku’s Q2 results, investment bank Oppenheimer raised its price target on ROKU stock to $90 from $75, based on the company’s rebounding ad business.
Further, analysts’ average price target on the shares is $84.94, well above the $67.77 level at which the name closed on Oct. 12.
On the date of publication, Larry Ramer 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.
