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Why Roku Stock Jumped on Wednesday

By Anders Bylund – Aug 26, 2020 at 12:01PM

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A highly respected analyst firm started coverage of the streaming media technology expert with a bullish rating and a lofty price target.

What happened

Shares of Roku (ROKU -5.44%) jumped as much as 9.7% higher on Wednesday morning, goosed by a rosy analyst report. By 11:15 a.m. EDT the media-streaming technologist's stock had settled down to a milder gain of 8.4%.

So what

Citigroup analyst Jason Bazinet started covering Roku today with a buy rating and a price target of $180 per share. Citi expects Roku to beat the market over the next year or so, boosting the share price by approximately 22% from Tuesday's closing price. Bazinet argues that the stock should be worth roughly $330 per active account, far above the current economic value of $130 per account. He also sees Roku's user base expanding to 70 million accounts by the end of 2021.

A businessman sits on his briefcase in deep thought.

Image source: Getty Images.

Now what

The true value of an active Roku account is not easy to figure out. These are free accounts rather than paid subscription plans, creating value by means of personalized advertising and sales of value-added products and services. The original sales of Roku-powered set-top boxes and smart TV platform licenses also enter that equation, but those amounts are small compared to the ongoing sales of ads and premium Roku apps.

It's not easy to see exactly how Bazinet's calculations will work out in the real world, but I do agree that Roku's stock is deeply undervalued right now. We just used different business analysis methods to reach very similar conclusions.

Anders Bylund owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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