Please ensure Javascript is enabled for purposes of website accessibility

Why Roku Stock Was Up 12% in August

By Jon Quast – Sep 3, 2020 at 1:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Analysts see a lot of upside after the company's latest quarter, but could a new competitor derail this growth story?

What happened

Shares of connected-TV platform Roku (ROKU 6.58%) were up 12% in August, according to data provided by S&P Global Market Intelligence. The month started with the company reporting earnings that beat estimates on the top and bottom lines; it ended with a competitor quietly validating its business model.

The earnings report, plus a slew of analyst upgrades, contributed to the stock's market-beating performance in August.

ROKU Chart

ROKU data by YCharts.

So what

On Aug. 5, Roku reported second-quarter earnings that showed year-over-year revenue growth of 42%. Perhaps just as important, active accounts were up 41% to 43 million. In other words, the company's revenue growth was built on substantial customer growth; it wasn't simply the result of people watching more TV, which would have been a short-term coronavirus boost. That's good.

The Q2 report was better than Wall Street expected, but Roku stock sold off some after management said it didn't expect ad spending to normalize until sometime in 2021. However, analysts were quick to remind investors of Roku's upside. While it was still trading under $150 per share, Deutsche Bank recommended buying the stock, giving it a price target of $185. Shortly thereafter, the German bank Berenberg gave it a price target of $181. These upgrades and others caused the stock to pop and fueled Roku's gains late in the month.

A man draws an upward arrow over a stock chart displayed on a transparent touchscreen.

Image source: Getty Images.

Now what

As alluded to above, Comcast (CMCSA -2.00%) might have validated Roku's business model at the end of August. According to a report from the website Protocol, Comcast is trying to get TV manufacturers to use its X1 platform as the default operating system (OS) for smart TVs. This encroaches upon Roku's turf. While Roku does sell external hardware to equip non-Roku TVs, it's progress as a smart-TV OS is a big part of a bullish thesis. Currently, one in three smart TVs sold in the U.S. are Roku TVs.

This is worth monitoring, but I don't believe this presents a dire situation for Roku. While some investors fear added competition, I see it as validation. Comcast is a mega-cap company. If it's interested in developing a smart-TV OS, it sees value in the business opportunity. Roku is already the growing leader in the space despite existing competition, and it's still too early to know if Comcast can even successfully persuade TV manufacturers. 

Jon Quast owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.