Roku (ROKU) was spun out by Netflix (NFLX) back in 2007; since then, it has morphed from a device maker to a platform company that hosts all streaming services with the exception of NBC’s Peacock, points out Glenn Roger, contributing editor to Internet Wealth Builder.
We recommended Roku when it was trading at $146.85 in August 2020. The stock benefited from the pandemic as people were forced to remain at home and the shares topped $450 in June 2021. But that was the high-water mark. The price fell all the way to $38.26 last December.
Roku has gained 81% since that low, I think somewhat in sympathy with Netflix’s positive outcome from clamping down on password sharing. Roku reported 17% growth in active accounts and a 20% increase in streaming hours in the first quarter, but it had a 5% decline in average revenue per user.
The company has launched a series of smart home products, which is a new business for it. These include security cameras, video doorbells, etc. It’s not clear how this ties in with the original mission but it will be interesting to see if these products catch on with consumers.
Roku is on track to achieve EBITDA profitability by the end of this year or the middle of next, so I think over time this is going to be an interesting play.
The company has some real growth opportunities in that it has lagged in terms of international rollovers compared to Netflix. It also has much lower content costs than some of its competitors, as it is primarily a platform as opposed to a content creator.
Analysts are divided on Roku’s prospects with several hold and sell ratings, and some outperform ratings as well. So, there's no clear consensus on where the stock could go. I think this is a good entry point so I'm going to suggest establishing a position and keeping a close eye on it.
Action now: Buy, with a target of $80.