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Why Roku Stock Was Up This Morning

By Evan Niu, CFA - Apr 29, 2021 at 12:06PM

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Wedbush upgraded Roku and suggested that investors take advantage of the recent pullback.

What happened

Shares of Roku (ROKU -3.83%) opened higher this morning, rising as much as 6%, after getting an upgrade from Wall Street. Many tech stocks have since pulled back and the stock has given up those gains. As of 11:30 a.m. EDT, shares were up less than 1%.

So what

Wedbush upgraded its rating on Roku from neutral to outperform while maintaining the same price target of $475. Analyst Michael Pachter noted that the stock has pulled back meaningfully in recent months, which presents investors with an "attractive" buying opportunity. Roku should continue to benefit from the secular shift of users from linear TV to over-the-top (OTT) streaming platforms, and the company is just starting to expand internationally.

The Roku Channel displayed on a flat-screen TV mounted on a wall, with a side table and a potted plant on either side of it

Image source: Roku.

"We expect advertisers to continue their migration from linear TV to over-the-top on-demand, where Roku is a primary beneficiary as it has dominant market share, a rapidly growing user base, and superior targeting capabilities," the analyst wrote in a research note to investors.

Now what

The $475 price target is derived from an enterprise-value-to-revenue multiple of 13 times 2023 expected sales, which Pachter says "reflects our view that the pace of growth is sustainable given the bulk of advertising still occurs on linear TV and will continue to shift in Roku's direction." 

Shares will likely remain volatile due to the lofty valuation that prices in high expectations, Pachter notes. Still, the analyst suggests that the pullback is providing a compelling entry point for long-term investors.

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