To Buy, Hold or Sell Roku, That’s the Question

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TipRanks

Mon, Sep 23, 2019, 9:09 AM

The Street is all over the place when it comes to Roku Inc. (ROKU- Get Report). In just the last three days, the streaming player company has received a Buy, Hold and Sell rating from Wall Street analysts. With 7 total ratings assigned in the last week, Roku is one of the highest trending stocks based on TipRanks’ Trending Stocks tool.

The ratings come on the heels of its 27% tumble in the last five days. That being said, it should be noted that shares have climbed a massive 253% year-to-date.

Bearing all of this in mind, we wanted to dig a little deeper to determine whether investors should dump Roku or if it’s still a compelling investment.

Here’s what we found out.

The Bad News

Part of the current weakness in share price comes after Pivotal Research’s Jeffrey Wlodarczak initiated coverage with a Sell on September 23. The intense competition Roku faces is the key driver of his bearish thesis.

Comcast (CMCSA- Get Report) dealt Roku a swift blow on September 18 when it announced the launch of its new, free set-top box service for its broadband-only customers. The service features several services, with the most notable being its access to content from multiple streaming platforms.

Roku’s business is also threatened by Apple’s (AAPL) new streaming service, Apple TV+, which could hinder its ability to compete in the streaming device space.

As a result, the 4.5-star analyst deemed Roku as “dramatically overvalued”.

“While Roku management deserves credit for the asset they have created, everyone has realized the living room is too important and the big boys (led by CMCSA) with massive leverage are likely to make ROKU growth much more difficult. We believe the growing competition will likely drive the cost of over-the-top (OTT) devices to zero and put material pressure on advertising revenue splits,” he noted. Based on all of the above factors, Wlodarczak set a $60 price target along with the rating which indicates 45% downside.

It’s Not All Gloom and Doom for Roku

With respect to the emergence of new competition, Macquarie analyst Tim Nollen also warns investors to take caution. That being said, he points out that Roku has a lot going for it.

As part of its ongoing efforts to improve its product offerings, Roku announced that it had updated its Roku Express and Roku Ultra streaming players. The Express, which starts at $29.99, is 10% smaller than the previous model and features HD streaming. Its more expensive Ultra player is priced at $99.99 and was revamped with improved hardware, lost remote locator, an enhanced remote as well as JBL headphones.

Not to mention it teamed up with Walmart (WMT) and Best Buy (BBY) to offer customers Roku Express+ for $39.99, Express with a voice remote and a Roku Ultra LT, a lighter Ultra model for $79.99. Best Buy will also have the exclusive selling rights for the Streaming Stick+ Headphone Edition (HE).

All of this prompted Nollen to reiterate his Hold rating and $110 price target on September 23. The price target indicates less than 1% upside potential.

Some Analysts Take a More Bullish Approach

However, Needham’s Laura Martin doesn’t believe a decline in hardware sales would translate to a drastic impact on Roku’s profits. “Even if Roku’s hardware sales went to zero tomorrow, hardware sales represented a total of 5% of Roku’s profit contribution – i.e. $27mm out of $500mm of gross profit for Roku in 2019, so the financial downside would be minimal,” she explained.

She adds that Roku’s client base is made up of more cost-conscious consumers than that of its competitors. Additionally, the company’s strategy is to go after a family’s second, third or even fourth TVs that are often cheaper and lower quality than TVs for the living room. “Since Comcast is only giving one free OTT box for its new modem-only customers and all other OTT boxes from Comcast will continue to be charged $5/month ($60/year) by Comcast, we expect Roku TVs and Roku sticks that cost $30-60 ONCE to continue to win (i.e. be the best choice) for TV #2, 3 and 4,” she commented.

All of this lends itself to Martin’s conclusion that Roku bears should be wary. With this in mind, the five-star analyst reiterated her Buy rating and $150 price target on the same day as Wlodarczak. She thinks shares could surge 39% in the next twelve months.

Another top analyst is even more bullish than Martin. D.A. Davidson's Tom Forte set the highest price target for Roku on September 19, coming in at $185. His price target demonstrates his confidence in Roku's ability to gain 71% over the next twelve months.

The Bottom Line

It’s no question that the rest of the Street has mixed feelings about Roku. Over the last three months, 8 Buy ratings, 5 Holds and 2 Sells have been assigned to the streaming platform giving it a ‘Moderate Buy’ analyst consensus. Its $124 average price target suggests 14% upside potential.