October is the month of tricks or treats, and Roku (ROKU) investors are hoping for more of the latter. Roku shares are up 17% this month, and according to the Street’s biggest fan, there’s more upside on the way.
Needham analyst Laura Martin raised her price target from $190 to a Street high of $255, suggesting room for a 15% uptick from current levels. Needless to say, the 5-star analyst’s rating stays a Buy. (To watch Martin’s track record, click here)
With Q3 earnings around the corner, Martin argues several data points suggest upside for ROKU's 3Q20 results.
Recent eMarketer data suggests, that by the end of 2020, with 100 million viewers in tow, Roku will have snagged almost 50% of the 206 million total US Connected TV (CTV) users.
“By implication,” says Martin, “if any new OTT service wants to launch in the US, it must be distributed by Roku to be successful. If not, it isn't viewable by a large segment of CTV viewers because the next largest platforms (AMZN FireTV and Game Consoles) each reach 30% fewer viewers than Roku.”
What’s more, the pandemic has only accelerated the installed base of CTVs.
In the US, growth of connected device sales increased from 1% year-over-year before the pandemic’s onset to between 20% to 60% in each week since COVID lockdowns were put into place, according to August 2020 NPD data.
“This is creating a larger installed base for Roku, in our view,” Martin notes, “Which should generate more revenue faster than expected (ie, will require upward estimate revisions) as advertising budgets rise.”
Which leads nicely to Martin’s next point. AVOD (advertising video on demand) took share from SVOD (subscription video on demand) in 3Q20. AVOD gained 600 basis points of market share at the expense of SVOD share losses, considering SVOD share fell 500 basis points quarter-over-quarter to 47.5% from 52.3%. Conversely, AVOD users rose from 25% in Q2 to 31% in Q3. Martin believes this share shift “is attributable to SVOD fatigue during 3Q20.” Roku being the dominant AVOD platform in the US, stands to benefit the most from this shift in viewers’ habits.
Overall, Roku has decent backing among Martin’s colleagues. Based on 14 Buys, 5 Holds and 2 Sells, the OTT leader has a Moderate Buy consensus rating. However, where the share price is heading, not all are as enthusiastic as Martin. At $179.1, the analysts forecast shares will change hands for a 19% discount over the next 12 months. (See Roku stock analysis on TipRanks)
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