What happened
Shares of over-the-top (OTT) streaming company Roku (ROKU +3.40%) were up a solid 2% at 12:50 p.m. EDT today after being up even more at 5% earlier in the day, and they may return to that level and beyond. At least according to Deutsche Bank they might.
Roku owes today's spurt higher to the investment bank, which this morning initiated coverage of the OTT leader with a buy rating and a $185 price target. Roku shares are about $149 right now, so Deutsche Bank sees 24% upside in the stock.
Image source: Getty Images.
So what
StreetInsider.com says that according to Deutsche Bank, the shift from wired cable television to OTT streaming is still in its early stages, and Roku, with 43 million users and a 50% market share when measured by total streaming hours, is the market leader in connected TV (CTV).
It's also growing like a weed. Roku began mainly as a hardware company, which Deutsche Bank considers a low-margin business. But its higher-margin software and advertising businesses are the key to future growth. The German bank estimates that U.S. ad spending on CTV will grow at better than 30% for at least the next few years, hitting $8 billion by 2023.
Now what
Roku is not profitable, nor does it generate positive free cash flow (FCF). But at a 30% or better growth rate, it could become profitable and FCF-positive in time. Analysts polled by S&P Global Market Intelligence forecast GAAP profitability by 2022, with profits exploding much, much higher in 2023 and beyond, as Roku claims its share of that predicted $8 billion ad market.
Deutsche Bank believes the time to buy the stock is now, before that happens. And today, investors apparently agree.
