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Should You Buy Roku (ROKU) Stock On Streaming Advertising Push?

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Shares of Roku (ROKU - Free Report) soared over 7% on Tuesday one day after Oppenheimer analysts upgraded the streaming TV firm. So now let’s take a look to see if Roku stock might be worth buying with the streaming content revolution set to continue. 

Upgrade

Oppenheimer analyst Jason Helfstein upgraded Roku to “outperform” on Monday. The company sells an array of devices that allow customers to watch their favorite streaming services such as Netflix (NFLX - Free Report) and Amazon (AMZN - Free Report) Prime all in one place, similar to Apple (AAPL - Free Report) TV, Google’s (GOOGL - Free Report) Chromecast or an Amazon Fire Stick. Yet, Oppenheimer cited the company’s Roku Channel and its new targeted advertising push as reasons to be more optimistic about Roku’s future.  

The Roku Channel allows users to watch hundreds of streaming movies and TV shows for free without a subscription, which Helfstein sees as a great way for the company to bolster its user base—Roku had roughly 21 million customers at the end of the first quarter, up 47% from the year-ago period. The relatively new offering makes Roku devices more enticing because it then becomes a standalone streaming service akin to Hulu and Netflix, on top of the ability to access users’ other streaming accounts.

 “The rapid adoption of The Roku Channel gives us incremental confidence in the channel's ability to garner viewership on other platforms, such as Samsung, allowing Roku to monetize a broader portion of the OTT ecosystem than we had previously assumed was possible,” Helfstein wrote.

Helfstein also set a new $50 price target for Roku, which marked 15% upside from Monday’s closing price. Roku, which went public last September at $14 per share, is also set to make much more money from its video advertising.

This upgrade comes just a week after Roku launched a new “Audience Marketplace” that will allow advertisers to buy ad space targeted directly to specific audiences, “by leveraging Roku’s first-party data and proprietary ad technology,” according to a company release.

21st Century Fox, (FOXA - Free Report) , Turner, Viacom (VIAB - Free Report) , and others have all signed on to sell TV ad inventory in the new marketplace. These ads will appear during programming that users watch on Roku devices that would already show advertisements.  

“Over-the-top distribution has been a key audience driver for Turner’s portfolio of premium content, with Roku being one of the preeminent partner platforms,” VP of Ad Innovation & Programmatic Solutions at Turner, Larry Allen, said in a statement. “Participating in Roku’s Audience Marketplace gives us access to rich insights and enhanced audience targeting capabilities, extending the ability for ad buyers to reach and engage with streaming viewing audiences that are critical to grow their business.”

Fundamentals

Now that we have covered the upgrade and what Roku does, let’s dive into some of the company’s other fundamentals to help investors see if the stock might be worth buying at the moment.

Last quarter, the company posted an adjusted loss of $0.07 per share, which actually came in well above the Zacks Consensus Estimate that called for a loss of $0.16 per share. Meanwhile, Roku’s revenues climbed 36% to $136.58 million. The company's average revenue per user also soared 50% to $15.07.

Looking ahead, Roku noted that it expects to operate at or near break-even on an adjusted EBITDA basis. The company also boasted that one in four smart TVs sold in the U.S. during Q1 were Roku TVs—televisions with built-in Roku—up from one in five in 2017.

For the full-year, Roku is projected to see its revenues climb by 35.5% to $694.99 million, based on our current estimates. At the other end of the income statement, Roku is once again expected to post an adjusted loss, which is hardly uncommon for a young tech company. With that said, Roku is projected to swing from an expected loss of $0.30 per share in fiscal 2018 to adjusted earnings of $0.04 per share in fiscal 2019.

Bottom Line

Roku is currently a Zacks Rank #2 (Buy) that has earned five full-year upward earnings estimate revisions against zero downgrades for 2018 and 2019, all within the last 60 days. The company is also expected to grow its user base through its free streaming content offerings, and bolster its advertising revenues through its new marketplace.

Meanwhile, the TV industry is slowly shifting toward an OTT model, which means companies like Roku will start to get more customers based on larger market trends alone.

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