Shares of Roku (ROKU 0.02%) got a boost on Tuesday, even as the overall market declined. The stock's gain came as Wells Fargo analyst Steven Cahall initiated coverage on the streaming platform specialist's stock with a $215 12-month price target. This target is notably higher than any other analyst's for the stock.
The company is positioned to benefit from the ongoing migration from traditional TV to connected TV (CTV), the analyst argues.
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The path to $215
"Roku's scale and ad tech will drive above-expectation advertising [average revenue per user] growth, creating a future heavyweight," said Cahall in a note to investors on Tuesday morning.
The TV-streaming platform company's scale truly is impressive. The Roku operating system, which powers both Roku's own over-the-top devices and many smart TVs, supports nearly half of CTV users in the U.S. Further, nearly one in three smart TVs sold in the U.S. are now Roku TVs.
In addition, Roku has been beefing up its advertising technology in anticipation of massive traditional television budgets eventually tipping toward CTV, where TV watchers are increasingly spending their time. Last year, Roku bought demand-side ad-tech platform dataxu for $150 million. Then, in May of this year, Roku unveiled its new OneView Ad Platform, which helps marketers manage their advertising campaigns.
Cahall believes this scale and Roku's positioning within the fast-growing CTV advertising market set the company up to grow its average revenue per user in the coming years, ultimately justifying a 12-month price target of $215, which represents about 30% upside.
Why Roku stock is worth considering
Roku's business strength has been put on display during the coronavirus pandemic. While many digital advertising companies saw revenue growth decline or slow significantly, the growth stock's platform revenue soared 46% year over year. While this business segment also includes revenue from the company's share of subscriptions on its platform, management did say its monetized video ad impressions were still up 50% year over year during the quarter.
Image source: Getty Images.
Roku has been able to grow its ad business rapidly even during the pandemic largely because it depends on CTV advertising revenue, which is the fastest-growing channel in digital advertising.
Roku is also well-positioned to capture growth in CTV ad revenue thanks to its rapidly growing user base. Active Roku accounts were up 41% year over year in Q2 and streaming hours soared 65% year over year, highlighting how Roku's value proposition is attracting new customers and engaging existing ones.
There are plenty of risks to buying Roku stock, of course. If competition begins making inroads on Roku's leadership position as the TV-streaming platform of choice in the U.S., the tech company may not carry the same clout with marketers and content publishers that it does today. The shift from traditional TV to CTV could also take longer than anticipated, presenting another risk.
Still, Roku's business is proving to be not only resilient during challenging times, but also a force to be reckoned with. Total second-quarter revenue rose 42% year over year to $356 million. Shares trade at a reasonable valuation relative to the company's strong growth prospects, making the stock even more attractive. Roku stock is currently trading at less than 10 times analysts' consensus forecast for next year's revenue.
Cahall seems to be onto something with his bullishness for Roku stock.
