Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

It's been about 3.5 months since Oppenheimer & Co., citing significant potential for improvement, relented on its underperform rating against Roku (NASDAQ:ROKU) stock and upgraded it to perform. Over that time frame, Roku shares have steadily appreciated from $34 in March to $43 a share today -- a 26% return in about 100 days.

Now, Oppenheimer upgrading Roku shares again -- this time to outperform.

Here's what you need to know.

The Roku Channel ad

Image source: Roku.

Recapping the March upgrade

To find out why, let's first take a quick look back at why Oppenheimer, which had believed Roku stock was too expensive, changed its mind and upgraded Roku in March.

The reason for that upgrade can be summed up in three words: The Roku Channel (TRC). An app available on Roku over-the-top (OTT) boxes and television sets with Roku software built into them, TRC offers free movies to Roku users, and generates ad revenue for Roku itself. As CEO Anthony Wood explained in a conference call last year laying out his plans for TRC, "[C]onsumers want free content. Free is one of the top search terms on our website. ... The Roku Channel really addresses that."

What's more, because Roku owns the channel rather than hosting it as a third-party app created by someone else, with whom Roku would need to share revenue, TRC also produces better revenue and better profit margin for Roku. Combined with the company's "automatic content recognition" technology for generating data about which viewers are watching which commercials and when, it holds the potential to become even more profitable for Roku over time.

"I love it when a plan comes together"

So how is this thesis coming together for Oppenheimer so far? As you can guess from Roku stock's 26% gain since the March upgrade, pretty well -- and there's a reason for that.

As Oppenheimer advises today in its upgrade note, covered on StreetInsider.com (subscription required), TRC now accounts for "0.63% of domestic time-spent on Roku's platform" and is attracting 9 million hours of viewing every month on average, making it Roku's "12th most-watched app by viewing hours." What's more, TRC has achieved this only nine months since launching, and it's logical to assume its success will only grow as more and more people come across the app and begin using it.

(Case in point: I own a Roku. I've never watched TRC. But now I'm starting to wonder what all the fuss is about and probably will.)

As Oppenheimer explains, it never "previously assumed [this level of adoption] was possible." Now that it sees it's not just possible, but actually happening, Oppenheimer is revisiting its earlier assumptions, gaining "incremental confidence" that TRC will "garner viewership on other platforms, such as Samsung, allowing Roku to monetize a broader portion of the OTT ecosystem," and recrunching its numbers.

Oppenheimer now estimates that Roku's "core platform" is worth $44 a share while the "off-platform Roku Channel opportunity" from revenue generated by placing TRC on TVs made by other companies is worth a further $7 a share.

The upshot for investors

There are two interesting things about these calculations, as I see them:

First, $44 plus $7 equals $51 a share in intrinsic value for Roku, which suggests there may be $1 more profit potential in Roku stock than even Oppenheimer's new $50 price target implies.

Second, while Oppenheimer assigns value to Roku's "core platform" (i.e., its advertising business, licensing its software, and basically everything "Roku" you see on a screen), it does not specifically assign any value to Roku's hardware business, which produces and sells actual Roku players.

On the one hand, that makes some sense because the player business is much less profitable (10% gross margin) than the platform business (75% gross margin). On the other hand, though, while data from S&P Global Market Intelligence confirms that Roku's player business isn't really growing its revenue anymore, it still accounted for $287 million in sales last year. That's more revenue than the platform business produced -- it's got to be worth something. And whatever it is worth would only add to the value of Roku stock as a whole.

Will all that value add up to Oppenheimer's posited $50 target price? Will it add up to an even higher share price than that? Until Roku turns profitable and begins generating some real free cash flow from its business, that's really hard to say. Still, analysts on average are predicting Roku will turn profitable next year, earning $0.02 per share -- then grow those profits 66 times in three years, earning as much as $1.32 per share in 2022.

Difficult as it may be for me, personally, to assign a value to a stock not currently earning profits, once Roku does turn profitable, I can see investors paying an awful lot of money to own a piece of that growth rate.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.