The bear market that has mauled the Nasdaq Composite continues, with the highly followed index down roughly 29% from its highs of late last year. However, many individual tech stocks have suffered far more, with many down 50% or more. Fears regarding rising interest rates, inflation at 40-year-highs, and the potential of a long, drawn-out recession are weighing on consumers and investors alike.
Company-specific challenges have added to investors' anxieties, with some worried that the sky is falling. Roku (ROKU +2.26%) is one of the tech companies dealing with high hurdles now. The combination of supply chain constraints and slowing streaming video growth have crushed Roku stock, which has lost as much as 72% of its value in 2022. It even managed to hit its 52-week low of $62 earlier this month.
At least one Wall Street Investment bank believes the selling has simply gone too far. D.A. Davidson analyst Tom Forte predicts that Roku stock could soar to $130 within the next 12 to 18 months. Roku stock has already recovered slightly to $68.40 as of this writing, but assuming it can reach $130, it still provides plenty of upside potential for investors who buy now.
NASDAQ: ROKU
Key Data Points
A perfect storm bearing down on Roku
As the pandemic waned and people returned to their day-to-day activities, streaming video growth seemed to hit a wall. This caused some investors to fear the worst. Families who had spent much of the past two years on the couch dropped their remotes and ventured outdoors, visited shopping malls, and went on vacation. That left less time for watching streaming video.
Furthermore, well-documented supply chain challenges hit many companies, and Roku wasn't immune. The Roku operating system is a fixture on many connected TVs, putting the streaming platform at users' fingertips, but many of those devices were in short supply. Furthermore, Roku had difficulty keeping its own streaming boxes and dongles in stock, further weighing on its viewer growth -- which climbed just 14% in the second quarter.
Finally, the macroeconomic environment caused many companies to hunker down, looking to cut expenses where they could. It's traditional to slash the marketing budget in such times, as it's easy to ramp up and ramp down advertising spending on short notice. The bulk of Roku's revenue comes from Roku's platform segment, most of which comes from digital advertising. In the second quarter, management noted a "significant slowdown in TV advertising," which further weighed on its platform growth.
Each of these headwinds is the result of temporary external factors, not Roku's business performance. This too, shall pass.
Two powerful tailwinds
Roku has been the beneficiary of a couple of powerful tailwinds that helped pushed its stock to new heights. Investors are concerned those days may be over, but a quick review of the evidence suggests otherwise.
Viewers are abandoning cable TV in growing numbers. The major pay-TV providers lost another 4.7 million subscribers in 2021, similar to the losses that occurred in 2020, according to Leichtman Research Group. The industry is on track to surpass that mark this year, shedding 1.95 million and 1.925 million people in the first and second quarters of 2022, respectively.
The most likely beneficiary of these cord-cutters? Streaming video, of course. And while most streaming services have to worry about competition, Roku's service-agnostic platform serves up all the major paid streaming services, as well as thousands of ad-supported channels. Since Roku gets a cut of subscriber dollars transacted on its platform, as well as a cut of all advertising, what benefits streaming, benefits Roku.
There's more. While roughly 78% of U.S. consumers view streaming video, digital advertising on streaming platforms makes up just 3% of the total. There's a paradigm shift occurring, with a groundswell of ad dollars moving to streaming channels. Since Roku gets a 30% cut of all advertising space on its platform, this shift will put more money in its coffers.
Simply put, Roku is the right company, with the right technology, in the right place, at the right time. The company's namesake Roku device is the industry leader, helping viewers aggregate their favorite video streaming services in one easy-to-use interface.
A bullish prognostication
Given these secular tailwinds, it's little wonder that many on Wall Street are betting on Roku. Of the 32 analysts with ratings on Roku last month, the majority of them (18) rated Roku a buy or strong buy, while seven rated the stock a hold. However, a couple of analysts are particularly bullish on Roku, expecting the stock to roughly double from here.
While DA Davidson analyst Tom Forte lowered his price target from $170 to $130, he maintained his buy rating on Roku stock. This would represent potential gains for investors of 90% from Tuesday's closing price -- and he isn't the only one. Citi analyst Jason Bazinet also has a buy rating and a price target of $125, or an 83% upside. If Roku stock reaches $130 over the next 12 to 18 months, it will mark a 110% gain from its 52-week low of earlier this month.
Furthermore, at its current price, Roku is trading near bargain-basement territory. The stock is currently trading for less than three times next year's sales, the lowest valuation in Roku's history.
The secular tailwinds and the historically low valuation give investors who buy now an unprecedented opportunity. Better get it before it's gone.
