Shares of Roku (NASDAQ:ROKU) have soared in recent weeks, quickly approaching the all-time highs the stock reached last year. While Roku has seen an influx of video-streaming activity on its platform amid the COVID-19 pandemic, it's also facing a significant downturn in ad spending, which makes up the bulk of its platform revenue.
But there are three big factors that should produce strong results for Roku and keep the stock climbing. Benchmark analyst Daniel Kurnos recently pointed out two of them -- recovering ad sales and relatively weak competition -- in a note to investors in which he increased his price target for the stock to $180. The third factor -- Roku's becoming a leading distribution platform -- may have even greater importance to the company and its investors in the long term.
Ad sales are already bouncing back from their lows
Unlike some ad-supported businesses, Roku's ad business never really stopped growing. Management warned investors about higher-than-normal cancellations in its first-quarter letter to shareholders. Still, executives expected to "deliver substantial revenue growth on a year-over-year basis, albeit at a slower pace and lower gross profit than we originally expected for the year."
Advertising spend on Roku's platform has returned to 85% to 90% of its pre-COVID levels, according to Kurnos' checks. He expects that number to continue improving in July.
One reason for the potential improvement is the ongoing Facebook (NASDAQ:FB) ad boycott. Kurnos sees more ad budgets moving off Facebook and onto platforms like Roku during the boycott. And while a few hundred million in monthly ad spend might not have a big impact on Facebook's results, it's potentially game-changing for Roku. Its platform business brought in $232 million total in the first quarter.
The more likely source of Roku ad spend, however, is traditional television. While marketers may have wanted to pull back on TV ad spend earlier, the third quarter was their first real opportunity.
Overall, connected-TV ad spend is expected to grow faster than any other digital ad format in the second half of the year. And Roku is in the premier position to capture that growth.
The competition is no match in smart TVs
Some analysts have expressed doubts recently about Roku's ability to maintain its market share in smart TVs, particularly as it starts producing more profits from its platform. Roku accounts for one-third of smart TVs sold in the United States and one-quarter of those sold in Canada.
TCL, Roku's biggest partner in the United States, recently partnered with Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google to offer an Android TV, distributed exclusively through Best Buy. However, Android TV doesn't have the same brand strength as Roku and it doesn't come highly recommended. Just 10% of Best Buy stores recommended the TCL Android TV over its Roku TV counterpart, according to Kurnos' survey. Additionally, Google isn't putting the same level of marketing into the product as Roku does. Roku pays for marketing and premium shelf space for its smart TVs.
Smart TV users are typically more valuable to Roku than its streaming player users. Smart TV users always launch the Roku home screen (no need to change inputs) and can provide more viewing data for Roku's ad targeting and content recommendations.
The new network distributor
In Roku's early days as a publicly traded company, it used to compare itself to Comcast (NASDAQ:CMCS.A) or AT&T (NYSE:T) as a pay-TV distributor. That was telling of how Roku saw itself in the future -- a key distribution partner for media companies.
And just like how AT&T and Comcast could negotiate the best carriage rates for cable networks due to their scale, Roku's now in that position. It had about 40 million active accounts as of the end of March, which is a lot more viewers than AT&T or Comcast.
And it's using that scale to negotiate with AT&T and Comcast for their new streaming services (HBO Max and Peacock, respectively). The two sides haven't reached an agreement yet, but it appears AT&T's more frustrated than Roku. Roku's not in any hurry to budge in its negotiations, either, as there's not much pushing it to make a deal.
As Roku continues to grow in scale, it should be able to negotiate better terms with earlier content partners to continue growing revenue long-term.