Shares of Roku (NASDAQ:ROKU) are on fire lately. The streaming video pioneer saw its stock soar 17.5% this past week, and on Friday it finally took out the all-time high it had established more than 11 months ago.
It may seem like an odd time for Roku to awaken from its slumber. Roku was still trading lower year-to-date through early July, bucking the bullish trend that was sending most stay-at-home stocks to fresh highs. It's also surprising to see Roku shooting higher when it's entangled in negotiations with at least two new prolific services. However, now that Roku is back as a market darling, the real question for investors is if it can keep building on that momentum. Let's take a closer look at the monster week that Roku has had, as well as what it will need to do to keep the bullish momentum rolling.
There's a lot of power in your hand
Rosier outlooks on Wall Street for the stock played a starring role in Roku's ascent. Citi analyst Jason Bazinet kicked things off earlier in the week by initiating coverage of Roku with a buy rating. His reasoning is that the market was valuing each active account as worth $330, well ahead of the $130 economic value per account. This may initially seem like a cause for bearishness, but Bazinet's point is that the market is giving the metric a juicy premium because of the perception that Roku will continue to growth both its number of users as well as how much it milks out of each user.
History bears out the bullish justification. The 43 million active accounts that Roku had at the end of June is 41% higher from where it was a year earlier. The average revenue per user has climbed 18% to $24.92 since last summer. He is setting a price target of $180 that is now just 4% above where the shares are now but represented 21% of upside when Bazinet made the call on Tuesday morning.
A couple of days later it was Jeffrey Rand at Deutsche Bank putting out a bullish analyst note on the stock. His data suggests that Roku continues to be the domestic leader in the connect TV market. His survey data implies that the adoption rate of connected TVs in the home is in the mid-30% range, but he concedes that it could be higher than that with some of those surveyed mischaracterizing the TVs they have with built-in connectivity. Roku also happens to be the platform of choice for smart TV manufacturers.
These are interesting times for Roku, and it's not all good. Roku still hasn't come to terms with HBO Max and Peacock to get those two platforms on its hub, eating away at its reputation as an agnostic player in this space that plays nice with now nearly all video services.
It's also reasonable to wonder if we'll still be streaming as much video from home at the other end of this pandemic. A record 14.6 billion hours were streamed through Roku in its latest quarter. The 65% year-over-year surge in consumption is a combination of the 41% pop in users as well as how much more time the average account is streaming during the shelter-in-place phase of the pandemic. The silver lining is that as we emerge from the COVID-19 crisis, ad revenue will also start to climb.
Roku is in a unique position. It didn't participate in the initial rally of stay-at-home beneficiaries, and in some ways it's just catching up for lost time. The situation with HBO Max and Peacock will bear watching, but more from the perspective of how it hurts the prospects for HBO Max and Peacock. If they fail without Roku it will actually give the connected TV leader more bargaining power in the future. Roku remains a one of the market's best growth stocks, and now it just needs to rise above the ho-hum outlook it provided earlier this month.