Roku (ROKU) has had a bumpy past few weeks. After peaking at over $138 on May 7th, the media streaming giant reported lackluster earnings that afternoon. Roku shares have been on a steady decline since then, falling nearly 22%.
Although the company’s Q1 earnings were not ugly, they weren’t gorgeous, either. Active users, total revenues, and average revenue per user were all up more than 35% year-over-year which, on paper, is quite impressive. However, with people have been permanently stuck at home, these numbers should be higher than ever. After declaring negative EBIDTA as well as losses per share that fell even below that of consensus, Wall Street has become rather bearish on ROKU.
Furthermore, investors fear that Roku’s current deal with Smart TV company TCL could come back to haunt the company. The partnership, which was formed in 2014, has successfully gained increased market share for both corporations. However, the issue lies in the fact that while TCL has done most of the heavy lifting in the relationship, Roku has reaped the majority of the benefits, aka increased user traffic and ad engagement. It is possible that TCL may become fed up and try to either renegotiate current terms or soon sign with a competitor; though, everything is still up in the air.
Regardless, for both the time being and the considerable future, Roku seems to be in a solid strategic position. First, the TCL problem will likely blow over very soon and, if not, Roku still has a number of different Smart TV companies with which it could potentially strike a deal. In addition, the streaming powerhouse did post strong revenue figures, and an array of trends are working in favor of Roku’s prolonged success. As ad spend continues to shift to the platform, subscriptions continue to surge, and competitors are forced to increasingly rely on now-outdated content, shareholders should be optimistic about Roku’s future.
Taking into consideration the company’s recent financial performance and competitive positioning, Wedbush analyst Michael Pachter maintains a Hold rating on ROKU along with a $136 price target. (To watch Pachter’s track record, click here)
Pachter realizes that while COVID-19 has created favorable trends for the company’s overall user engagement, the lower advertising is quite severe to its bottom line, just as it has been to other ad-dependent companies such as Facebook, Snapchat, and Twitter. The analyst estimates a minimum 20% decline in total ad spend, a bullet that is impossible to dodge.
Despite these headwinds, the pandemic has given the market a firsthand look at many long-term trends that will be essential to the company’s future success, including cord cutting and, in turn, a shift in ad spend from television to streaming services. Plus, as production schedules for original content creators continue being delayed, more consumers are likely to resort to free, ad-bearing streaming services that available on the platform, such as Tubi or Vudu. Although ROKU is not living up to its recent highs, Pachter suspects that the tech titan will arise from these pressing times in a comfortable competitive position.
All in all, Wall Street is evenly split between the bulls and those choosing to play it safe. Based on 14 analysts tracked in the last 3 months, 7 rate ROKU a Buy, 5 say Hold, while 2 recommend Sell. Notably, the 12-month average price target stands at $126.54, marking a nearly 17% in return potential for the stock.
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