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Roku Stock: Headed to $255?

By Daniel Sparks – Oct 9, 2020 at 6:41AM

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Rapid growth in users and engagement, combined with the proliferation of advertising-supported streaming services, could help this growth stock thrive.

Shares of Roku (ROKU -7.10%) surged on Thursday, hitting a new all-time high. The stock's big jump was fueled by an optimistic note from an analyst who significantly boosted her 12-month price target for the streaming-TV specialist.

Many analysts have been growing increasingly bullish on Roku. This mounting positivity for the growth stock comes ahead of both the election and the holidays, when streaming-TV ad spots are expected to see a huge influx of demand from marketers.

Here's a closer look at why this analyst just upped her price target for the growth stock by $65.

A chart showing a stock price moving higher

Image source: Getty Images.

The path to $255

Needham analyst Laura Martin boosted her price target on Roku stock from $190 to $255 and reiterated a buy rating for shares. The company's substantial growth in its user base during COVID-19 and rising adoption of advertising-based video on demand (AVOD) services, like NBCUniversal's Peacock and Walt Disney's Hulu, bode well for Roku, which is the leading streaming-TV platform in the U.S.  Martin notes that Roku has seen accelerated growth in viewing hours and homes that only watch TV over the internet.

Backing Martin's view, management noted in Roku's second-quarter shareholder letter that it had seen an acceleration in both year-over-year active account growth and user engagement. In Q2, active accounts increased 41% year over year. This compares to 37% growth in the first quarter of 2020. Total streaming hours on its platform soared 65% -- an acceleration from 49% growth in Q1. 

In total, Roku had 43 million active accounts in the second quarter of 2020. Total hours streamed on its platform during the period were 14.6 billion.

A couple watching TV and eating popcorn

Image source: Getty Images.

Roku's advertising opportunity

Notably, however, Roku's revenue growth actually decelerated in Q2. Total revenue rose 42% year over year, down from 55% growth in the prior quarter. This occurred because many advertisers paused or reduced their ad spend as they reacted to stay-at-home orders amid efforts to combat COVID-19. With many businesses needing to temporarily shut down or reduce their operations during the period, advertising unsurprisingly took a hit.

Though connected-TV (CTV) advertising only represents a portion of Roku's total revenue, it's become an increasingly important revenue source for the company in recent years. In fact, Roku-monetized ad impressions on its platform were consistently growing at rates of greater than 100% year over year in the quarters leading up to the COVID-19 pandemic.

The point here is that many businesses that had shut down or were operating at significantly reduced capacity have started ramping back up, likely leading to a resurgence in ad spend and ultimately benefiting Roku. Advertising, particularly on connected TV, may be nearing pre-COVID growth levels. Indeed, a recent Harris Poll survey showed a handful of reasons to believe it's likely going to be a good holiday season for CTV advertising.

When you combine Roku's recent surge in its user base with reasons for optimism for the future of CTV advertising, the streaming-TV platform will likely continue to see strong top-line momentum in the coming quarters, possibly helping justify Martin's bullish view for the stock.

Daniel Sparks owns shares of Roku. The Motley Fool owns shares of and recommends 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.

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$56.42 (-7.10%) $-4.31
Walt Disney Stock Quote
Walt Disney
DIS
$95.93 (-3.52%) $-3.50

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

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