Momentum is starting to turn in Roku‘s (NASDAQ: ROKU) favor. Shares of the streaming platform operator are hitting three-month highs this week, and while some are attributing the recent gains to takeover speculation, there are a couple of Wall Street pros who are starting to feel better about Roku’s prospects even if it remains a swinging single.
Last week, it was Benjamin Swinburne at Morgan Stanley upgrading the stock, lifting his rating from underweight to equal weight. Swinburne argues that the sell-off earlier this year was overdone and that Roku’s core fundamentals including average revenue per user and account growth continue to clock in ahead of market expectations. An “equal weight” call is the equivalent of neutral, but the big takeaway from his action is that he’s no longer bearish on the investment.
The week before that it was Citron Research’s Andrew Left stunning the market by announcing that he was recommending the stock. Left had bashed the stock late last year, calling the valuation a joke. Now he sees the stock trading at a discount to the industry’s over-the-top peers, presenting more upside for Roku’s valuation to expand.
Look beyond this week’s buyout buzz and you’ll see a company in a unique position to cash in on the streaming video revolution. When it comes to digital video content the undisputed top dogs are Netflix (NASDAQ: NFLX) on the premium end and YouTube on the ad-supported front. However, the secret to Roku’s success as the conduit of choice is in its all-encompassing agnosticism.
Roku doesn’t play favorites. Unlike the tech giants battling other tech giants as they try to push their streaming services front and center, Roku’s platform is an open door. The Fire TV Cube that was introduced earlier today looks great, but it’s not viable to anyone who cut the cord to go with YouTube TV. Roku doesn’t fight those battles, though it’s not beyond cashing in on royalties it receives for smoking out leads.
Roku is showing up in more smart TVs even as it expands its portfolio of streaming media players across all price points. The installed base of active accounts on Roku’s platform has soared 47% over the past year to 20.8 million. Netflix is entertaining a crowd that is six times larger, but while Netflix’s average revenue per user is limited to how high it can boost its monthly price we’ve seen Roku’s average skyrocket 50% over the past year as users consume more streaming services. Platform revenue more than doubled for Roku in its latest quarter.
One can rightfully argue that Roku is generating a lot less per user than Netflix or most premium services. It’s the middleman to other middlemen. However, as the thinking investor’s play that covers all of the platforms, it’s a winning bet. Roku is a play on streaming video, and not the success of any individual content service. The stock may not be cheap by most measuring sticks and quarterly deficits continue, but it’s a safer bet to still be standing in a few years than any single content service.
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