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Is Roku About to Zoom 32% Higher?

By Eric Volkman – Updated Sep 8, 2020 at 4:42PM

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Wells Fargo certainly believes so; it just initiated coverage on the stock with a glowing analysis.

Roku (ROKU -0.76%) is a seriously undervalued stock that has the potential to produce double-digit returns. At least that's the view of Wells Fargo analyst Steven Cahall, who on Tuesday initiated coverage of the company's stock with a resounding overweight recommendation and a $215 per share price target. That figure is 32% above Roku's current level.

Cahall is impressed with Roku's ability to draw revenue from its user base. As that base is growing robustly, the company is benefiting. In its most recently reported quarter, both revenue and the number of active accounts were up by just over 40% year over year. This was especially heartening given the pullback in ad spending across the media landscape in the wake of the coronavirus pandemic.

Two people seated on a couch watching TV.

Image source: Getty Images.

The company is in a fine position to take advantage of the continued migration to video streaming services, particularly since it is provider-agnostic. A user can access a Netflix account via the Roku platform, for example, and easily switch to a competitor such as Walt Disney's Disney+.

"The migration to connected TV (CTV) is not in debate, but the ecosystem is pitting CTV operating systems against content apps," Cahall wrote in his analysis. "We believe Roku's scale and ad tech will drive above-expectation advertising [average revenue per user] growth, creating a future heavyweight."

As is typical when a big-name bank tags a stock as a screaming buy, Roku's shares were juiced by Wells Fargo's recommendation. In trading on Tuesday, the stock was up by 1.7%, bucking the overall bearish trend of the wider market.

Eric Volkman owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix, Roku, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$56.08 (-0.76%) $0.43
Walt Disney Stock Quote
Walt Disney
DIS
$98.87 (-0.01%) $0.01
Netflix Stock Quote
Netflix
NFLX
$285.54 (-2.04%) $-5.96
Wells Fargo Stock Quote
Wells Fargo
WFC
$47.44 (0.23%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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