Roku Inc ROKU slipped 15% Monday on a Morgan Stanley downgrade. The scenario presented a fortunate buy opportunity for one market expert.
The Rating
Needham analyst Laura Martin maintained a Buy rating on the stock and raised her price target from $150 to $200.
The Thesis
Needham values Roku based on platform economics akin to those of YouTube, iOS, Android and Facebook.com. Upside potential comes from “winner take most economics, walled garden data advantages, scale economics and enormous barriers to entry,” according to Needham.
In 2020, the firm is expected to swell on DataXu-driven ad improvements, increasingly valuable data algorithms, and accelerated revenue growth for subscription video on-demand, particularly for non-Netflix, Inc. NFLX distributors. Additionally, Roku could capture new households whose older TVs are incompatible with the latest streaming apps.
“In the U.S., we believe YouTube is the winning aggregator of user-generated videos and Roku will be the winning aggregator of TV and films,” Martin wrote in a report.
Needham expects an increase in Roku’s negotiated revenue shares as the platform grows its installed base. At the same time, it's slated to profit from an uptick in customer acquisition spending by Walt Disney Co DIS, Apple Inc. AAPL, Comcast Corporation CMCSA and AT&T Inc. T.
“Any OTT service trying to get new subscribers (or viewers to watch their free content) must spend more ad dollars on Roku or risk ignoring 40% of connected TV homes that their competitors are reaching,” Martin wrote.
The circumstances position Roku to rake in ad revenue.
“Where does $70 billion of U.S. linear TV ad revenue go in 2020 as young wealthy U.S. viewers spend more time behind paywalls with zero ads? Roku is our answer,” Martin wrote.
Price Action
At time of publication, Roku's stock traded higher by 1% at $137.31 per share.
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Photo courtesy of Roku.
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