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Why Roku Stock Soared Today

By Evan Niu, CFA - Apr 16, 2020 at 2:28PM

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Berenberg initiated coverage of the video-streaming specialist with a buy rating.

What happened

Shares of Roku (ROKU -4.07%) have soared today, up by 12% as of 1 p.m. EDT, after Berenberg initiated coverage of the streaming TV company with a buy rating. The firm assigned a price target of $137, representing about 21% upside from yesterday's close.

So what

Berenberg suggests that Roku is uniquely positioned to benefit from ongoing cord-cutting, as well as intensifying competition in the streaming wars, since Roku is an agnostic tech platform that offers a wide variety of over-the-top (OTT) streaming services. The COVID-19 pandemic is hurting the advertising market -- which Roku conceded earlier this week -- but those headwinds are expected to be short-term in nature.

The Roku Channel on a TV

Image source: Roku.

Ad spending should recover in the long term as consumers continue shifting toward ad-supported content like The Roku Channel, which will help Roku improve ad monetization. Advertising revenue accounts for the bulk of Roku's platform business.

Now what

Roku updated its first-quarter guidance earlier this week, with revenue expected to come in higher than initially forecast. The company reported strong gains in its core operating metrics like active accounts and hours streamed, as consumers are watching more TV while stuck at home. Roku now has nearly 40 million active accounts, and each account is streaming more hours on average.

The same trends that have driven Netflix shares to all-time highs should also benefit Roku, although each streaming TV company utilizes a different business model. Roku reports first-quarter earnings on May 7.

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