Roku (ROKU) stock fell along with the overall market when news came out that the coronavirus had spread considerably beyond China. Year-to-date, Roku is down nearly 24%, and investors are still expecting a volatile ride ahead so long as the coronavirus prevails.
5-star RBC analyst Mark Mahaney, however, believes Roku is set up for further growth in 2020, after what can only be described as a mercurial ascent in 2019, in which Roku’s share price skyrocketed by almost 350%.
Mahaney reiterated an Outperform rating on Roku shares, while keeping his $170 price target intact. Should the target be met, shares could be in for a 66% twelve-month gain. (To watch Mahaney’s track record, click here)
Mahaney recently held a conference call with Roku CFO Steve Louden to discuss the company’s future prospects and plans. Let’s look at some of the analyst’s key takeaways:
The Long Term Plan
Roku’s road to profitability and expansion will be driven by two factors: Active Accounts and ARPU (average revenue per user). Right now, Roku’s 37 million active accounts generate ARPU of $23 each per year.
Roku sees its long-term monetization possibilities falling somewhere between the two current existing models. The traditional cable model which generates roughly $70 ARPU and the digital/YouTube model which generates roughly $250 ARPU. This implies considerable growth potential from Roku’s current $23 ARPU. Roku also stands to take a cut of revenue from SVOD and TVOD on its platform. As far as growing active accounts, Roku believes further monetization is set to come from the untapped international market. Netflix, for example, currently draws two thirds of its subscribers from foreign markets. Roku is only at the beginning of its international; expansion, indicating there’s massive room for growth.
The International Opportunity
Roku is currently available in one form or another in 20 countries. Mahaney goes on to count the ways Roku has an advantage when entering new markets: “a) Roku benefits from having a purpose-built TV streaming OS that translates into a BOM (bill of materials) cost advantage for OEMs (original equipment manufacturers) ; b) Roku is a neutral advertising platform, unlike Google or Amazon; c) Roku’s UI is easy to use and thus conducive to the TV experience; and d) ROKU has significant expertise in free ad-supported TV.”
The Roku Channel
Roku has another card up its sleeve, in the form of the Roku Channel. With 56 million viewers, more than 10000 movies, 40 subscription channels, and 55 linear channels, it is one of the top five apps on Roku. According to Mahaney, Louden noted that further investment is expected in content, product development and category expansion, amongst others.
Looking at the macro element of the story, Roku is in an enviable position where it stands to gain whether the coronavirus has a longer lasting impact on the economy or not. Should the virus abate, and the economy pick up, people will be upgrading to faster internet speeds to watch Roku’s ever-growing number of streaming services. Should the coronavirus spread any further, more people will be staying in to watch Roku content. Win-win.
Looking at the consensus breakdown, Roku’s 6 Buys, 2 Holds and 2 Sells coalesce into a Moderate Buy consensus rating. The average price target comes in at $150.56 and implies additional upside of nearly 50%. (See Roku stock analysis on TipRanks)