Although people have been spending more time watching TV this year amid the COVID-19 pandemic, monetizing that engagement isn't as straightforward. Leading streaming-TV platform Roku (NASDAQ:ROKU) has been warning investors that the ad industry remains highly uncertain, even as core operating metrics like active accounts and hours streamed march steadily higher into record territory.
Beyond 2020, one analyst isn't worried about the company's long-term prospects.
A new Street high
This week, Wells Fargo initiated coverage on Roku shares with an overweight rating alongside a price target of $215 -- now the highest valuation estimate on Wall Street. That target represents 34% upside from last week's close.
Analyst Steven Cahall is confident that broad shift to streaming services is in full swing, and it will continue to cause a related shift in ad spending from linear TV to those tech platforms. That largely echoes the vision that Roku management has been laying out for years, and Cahall argues that Roku is an "advertising heavyweight in the making."
Roku's OneView advertising and analytics platform is disrupting the ad-buying process, in Cahall's view. The company acquired demand-side platform (DSP) Dataxu last year for $150 million and relaunched it in May under the OneView brand. At the same time, one of Roku's strengths has always been that it is an agnostic platform that doesn't favor any particular streaming service.
"Our checks suggest its DSP-neutral approach makes it easy for marketers to deploy, and marketers are impressed with the ease of OneView analytics," the analyst wrote in a research note to investors. In many other cases, there are underlying tensions and competition between streaming-TV platform operators and rival services, according to Cahall.
The discrepancy between engagement and monetization has become plainly evident in recent quarters. For example, Roku's average revenue per user (ARPU) increased by just 18% last quarter, compared to the 65% surge in hours streamed. Ultimately, it will all boil down to how well Roku can monetize its growing user base, but Cahall is optimistic because having such a large base of active accounts gives the company more pricing power in its advertising business.
The analyst estimates that if Roku can grow its ARPU per month by a compound annual growth rate (CAGR) of 15%, that figure can reach $3.60 by 2025. Roku presents ARPU as a trailing-12-month (TTM) metric, which now stands at $24.92. For the sake of comparison, annualizing Wells Fargo's estimate translates into ARPU of $43.20 per year.
"The migration to connected TV (CTV) is not in debate, but the ecosystem is pitting CTV operating systems against content apps," Cahall said. "We believe ROKU's scale and ad tech will drive above-expectation advertising ARPU growth, creating a future heavyweight."