Markets

Have We Hit Peak Roku?

One of this year's hottest stocks is showing no signs of cooling down. Roku (NASDAQ: ROKU) hit another all-time high on Monday, as a favorable mention in Barron's over the weekend introduced a new wave of buyers to the video streaming pioneer that has developed quite the second act as an industry-leading platform operator. 

Shares of Roku have now more than quadrupled in 2019, and it's only logical to wonder when the rally will end. No stock goes up forever. However, hesitant investors were also cautious about Roku when it doubled and then tripled this year. No one truly knows where the ceiling will be. 

An Insignia smart television monitor with Roku's operating system running.

Image source: Roku.

Clicking the right buttons

We're living in a transformational time when it comes to television. Consumers are shifting away from conventional linear experiences where only dozens, if not hundreds, of channels are available in real time. The open-ended universe of video streaming -- where nearly every show and movie is available at a couch potato's beck and call -- is the new normal. Where the term "cord-cutting" once seemed so disparaging, it's actually now an emancipation from limited programming, and Roku is there leading the charge.

In his weekly Barron's Technology Trader column, Tae Kim argues that Roku is the best way to play the streaming revolution. Roku has evolved from its origin story as a maker of gadgets that turn any TV into a smart one. It's the platform of choice for smart TV manufacturers, as its agnostic operating system is home to thousands of streaming apps. 

We know consumers love Roku. Revenue soared 59% in its latest quarter. Roku still sells the hardware that put it on the map, but the lion's share of its revenue is now coming from the high-margin platform that fuels a growing number of streaming sessions. The 30.5 million active accounts spent 9.4 billion hours of streaming through Roku, and that breaks down to more than three hours a day per account. Average revenue per user is growing faster than its audience, as engagement and the ability to better target ads generate a windfall of money coming its way.

Is a strong leadership position enough to justify a stock that is another good trading day away from quintupling in 2019? At its high on Monday the stock was just 3% away from the Street-high analyst price target of $150

The future is undeniably bright for Roku. Major services are launching ahead of the holiday shopping season, and that will give Roku even more opportunities to cash in as services try to stand out before its growing audience of voracious streamers. Average revenue per user will continue to move higher, stacked on top of its account growth. 

The stock will take breathers along the way. It's not as if Roku's fundamentals have improved fivefold this year. Some of the future catalysts could already be baked into the price of what is one of the market's top stocks this year. The corrections will happen, and they've even happened leading up to 2019's stellar returns. We're not at peak Roku. 

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Rick Munarriz owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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