If you're a fan of nice round numbers, Roku (ROKU 1.38%) gave you a treat over the weekend -- as long as you're not a shareholder. Shares of the streaming video pioneer closed out the trading week exactly at $60, moving nearly 7% lower in on otherwise upbeat week for investors.
There are a few legit reasons for Roku coming under fire lately, and I'll get there. However, hope springs eternal this week with Susquehanna upgrading shares of the country's leading hub for streaming online services through your TV. The analyst firm is upgrading the stock from neutral to positive, slapping a $75 price target that implies exactly 25% of near-term upside in the shares.
The new price goal may not seem like much to investors who got in when the shares were approaching $500 two summers ago. There are also a few concerns when it comes to Roku despite leading the market with 70 million active accounts, and growing. Let's take a closer look at this week's new analyst call, and why the future for Roku may be brighter than the stock chart seems to suggest at the moment.
Channel surfing
Susquehanna accepts that there are some near-term hurdles for Roku to clear. It recently posted its first sequential dip in average revenue per user during its six years of public trading. Losses widened sequentially with every passing quarter in 2022, and analysts are bracing for a larger loss in 2023. Roku is competing in its niche against some of the wealthiest consumer tech companies in the planet, and it's investing in proprietary content and new product lines where it doesn't have the same kind of financial ammo as its rivals.
Roku can't seem to catch a break. Earlier this month, even its cash-rich balance sheet took a hit when it revealed that it had $487 million in deposits -- a little more than a quarter of its cash assets -- at the failed Silicon Valley Bank. Susquehanna still believes that it's time to get more bullish on Roku.
This week's note suggests that the connected TV market is a good place to be at the moment. Advertising dollars are shifting from linear platforms to streaming and it feels as though the scatter market for marketers bottomed out near the end of last year. Susquehanna points to Roku beta testing some platform features that could deliver high-margin revenue from third-party digital service providers.
Image source: Getty Images.
If you can get beyond the red ink -- and that's easier when you consider that this is a cash-rich company where 74% of its liquidity was not resting at Silicon Valley Bank -- this is a better story than the stock's price action. Let's start with last month's financial update. A widening quarterly loss on flat year-over-year revenue growth isn't very exciting, but Roku exceeded all four metrics it provided in its earlier guidance. It was bracing the market for an 8% decline on the top line.
It begins this year with a record 70 million homes on its platform, 9.9 million more than it was servicing at start of 2022. Roku's outlook for the current quarter shows an end to the streak of widening sequential losses, its first quarter-over-quarter improvement on the bottom line in two years. Engagement is also on the rise, with accounts streaming an average of 3.8 hours a day (up from 3.6 hours a year earlier). Roku is also starting to make headway internationally. Roku is the leading platform for TV streaming in the U.S., Mexico, and Canada where it commands between 30% and 38% of each country's share of smart TVs sold. It's starting to see success as it grows its reach outside of North America, specifically singling out Brazil, the U.K., Germany, and Australia as recent success stories.
If Susquehanna is right about the ad market starting to turn the corner -- essential, since Roku's operating system is free for consumers -- the stock may finally start to reverse the last two years of declines. The long-term outlook has always been bright for streaming video stocks. Roku was just running dry of vocal believers on Wall Street, but it won one back this week.
