Streaming stocks have absolutely taken off in recent years. Even prior to the pandemic, investors increasingly focused on the intense pressure cord-cutting had been having on traditional network TV.
This strong secular catalyst continues to this day. As consumers shift toward streaming options, rather than tuning into their favorite cable networks, Roku , Inc. (NASDAQ:ROKU) has been a key beneficiary.
This quasi-hardware, quasi-streaming play has transformed the way many entertain themselves. I am neutral on the stock. (See ROKU stock charts on TipRanks)
Roku’s Business Model Intriguing for Investors
As a spin-off from a shelved Netflix (NASDAQ:NFLX) hardware program, Roku has grown to become a leading player in the hardware powering the at-home entertainment/streaming transition. Users can simply plug a Roku device into any compatible TV, and turn it into a streaming paradise.
Roku’s role in facilitating the cord-cutting phenomenon we’re seeing play out has been extremely attractive to investors. Additionally, this business model has proven to be profitable for Roku, a company that’s had four consecutive profitable quarters.
Accordingly, ROKU stock has taken off, trading above $350 per share as of this writing, a 115% increase from where it was a year ago.
The company’s market share for its video streaming hardware is almost 50% of the domestic U.S. market. In terms of global market share, Roku is currently working its way into the top five for over-the-top (OTT) media services. That’s impressive in its own right.
Move to Digital-First Business Model
The shift Roku has recently made toward a more digitized approach to its sales funnel is starting to pay off.
The company’s focus has increasingly been on making licensing deals with television manufacturers to have Roku’s technology embedded in smart TVs. In 2020, 38% of all smart TVs produced had Roku’s platform embedded.
Given the transition other streaming players are making in this regard, Roku has been able to gain more market share, at more impressive margins.
Licensing deals bring more eyeballs to Roku’s platform, including its Roku Channel, which is growing its content in a big way.
In May, the company announced the addition of 30 exclusive shows to its Roku Channel. This comes after the company acquired Quibi’s content library in January.
What’s Next for ROKU Stock?
There’s a lot to like with respect to Roku’s growth potential. This is a company whose revenues are expected to grow 58.6% in 2021, and 36.3% in 2022. Even if Roku’s growth slows to the lower double-digit range, this is a stock with the potential to outgrow many of the larger names in its sector. That’s what many long-term investors appear to be attracted to right now.
With the Delta variant of COVID-19 surging, there’s certainly potential for streaming stocks to get outsized attention in the quarters to come. However, investors pricing in a return to normal over some reasonable time frame may find themselves questioning the growth rate that’s being baked into ROKU stock right now.
If the market starts questioning the inputs they need to put into their models to get to some reasonable level of capital appreciation, this is a stock that could stall.
What Analysts Are Saying About ROKU Stock
According to TipRanks’ analyst rating consensus, ROKU stock comes in as a Strong Buy. Out of 14 analyst ratings, there are 13 Buy recommendations and 1 Sell recommendation.
The average ROKU price target is $502.15. Analyst price targets range from a low of $310 per share, to a high of $650 per share.
Bottom Line
Roku is a company that needs to stumble before investors are likely to discount this play. The company’s impressive track record of growth suggests this stock could catch another wave. After all, it’s a momentum trader’s market these days.
However, this stock has a valuation that’s at the higher end of what many investors consider to be reasonable. As such, any sort of catalyst that impacts valuations across the board could hit Roku hard. Investors looking for high-growth stocks such as Roku need to be aware of the high-risk nature this play provides.
Disclosure: On the date of publication, Chris MacDonald had no position in any of the companies discussed in this article.
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