Roku (NASDAQ: ROKU) Makes Hay While The Sun Shines

It mightn’t have been obvious at the time, but a pandemic that shuts all non-essential businesses and forces millions of people to stay at home can only lead directly to a surge in the numbers watching their widescreens. In hindsight, it definitely wasn’t obvious as shares of digital media player and manufacturer Roku (NASDAQ: ROKU) were slaughtered just like every other equity in Q1.

From the end of January through the middle of March, they lost 60% of their value, a move that suggests investors thought Roku were going to go out of business rather than thrive. But shares didn’t hang around the lows long and by the end of March, it was clear where the smart money was going. The likes of Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Shopify (NYSE: SHOP) were all above pre-COVID levels by April and though there’s still a little way to go, Roku is closing in on that goal fast. The stock is up 165% from Q1’s low and all the evidence suggests it’s only going one way.

Roku Upgrade Upon Upgrade

The company’s Q1 earnings at the start of May confirmed the bulls’ thesis and must have been tough reading for the weaker hands who dumped their positions the previous quarter. Year on year revenue growth was up a startling 55% and even higher than analysts had been anticipating. Platform revenue was up even more, with 73% growth year on year, helping to drive gross profit up 40%. The cherry on top was the year on year jump of 28% in average revenue per user.

The past few weeks have seen a non-stop onslaught of analyst upgrades and raised price targets for Roku shares as Wall Street races to price in the rapidly expanding over-the-top (OTT) market and surging consumer demand that the coronavirus has created. On Monday, Benchmark reiterated their Buy rating and boosted their price target to $180, implying a 15% rally from current levels. A cresting second wave of COVID-19 means a prolonged uptick in OTT demand, especially if things like live sports continue to be postponed. Even in a post-COVID landscape, the firm is bullish on Roku’s ability to maintain market share and continue prospering.

On that point, only last week Macquarie were out with a note suggesting Roku will see upwards of 35% revenue growth for at least the next three years. At the end of last month, Berenberg reiterated their Buy rating and came out bullish on the company’s ability to take advantage of digital ad spending which is growing as consumers continue to get rid of cable and move to OTT services.

Realistic Talk

Management showed a mature streak in May’s earnings report by maintaining a somewhat realistic if not cautious tone in their letter, with CEO Anthony Wood warning that “overall advertising expenditure in the U.S. is likely to fall in 2020” but that “we expect our ad revenues to still grow substantially year-over-year”. He definitely can’t be blamed for hyping the opportunity too much as he also warned that “depending on the impacts of COVID-19, we are likely to run at an adjusted EBITDA loss for FY 2020 given that much of our operating expenses are headcount and facilities-related and therefore generally committed in the short-term.”

This clearly hasn’t put investors off however and shares are up more than 20% in the two months since then. Those thinking about getting involved can be confident that they’re buying into a company that has hit its stride and is set to push on to fresh all-time highs in the coming weeks. As this second wave of coronavirus cases crests and makes landfall, new restrictions and canceled reopenings are set to return also. And this can only mean one thing for one of the world’s leading providers of digital streaming entertainment.