Video streaming platform Roku (ROKU) has carved itself a leading role in the industry over its 22-year history.
Roku is the No. 1 streaming operating system in the sector, with over 80 million active accounts in the first quarter, up 14% from a year earlier.
The company “provides the most-used streaming operating system in the U.S. through the streaming devices and televisions that it manufactures or licenses its name and software to,” wrote Morningstar analyst Matthew Dolgin.
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Roku reported first-quarter earnings on April 25. Net revenue totaled $882 million, up 19% from a year ago. It posted a net loss, which narrowed to $50.9 million, or 35 cents a share, in the first quarter from $193.6 million, or $1.38 a share a year earlier.
The ongoing losses and cutthroat competition have caused Roku shares to tumble since November, leading analysts to rethink their Roku stock price targets, and Cathie Wood to take action.
Analysts reboot their Roku stock outlooks
Analysts are concerned about Roku's future.
“Roku had a very good first quarter, with impressive user engagement driving strong revenue growth and EBITDA (earnings before interest, taxes, depreciation and amortization) that is tracking better than our full-year forecast,” Dolgin said.
“Management tempered expectations a bit for the second half of 2024 but believes it is setting itself up for acceleration in 2025.”
He’s skeptical. “We’re concerned that Roku’s customer acquisition costs must remain elevated for the account base to continue growing at a healthy clip.”
So, he slashed his fair value estimate to $50 per share from $75 while maintaining his no-moat rating. No moat means he doesn’t see Roku as having durable competitive advantages. The stock traded at $59 on May 2.
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Most other analysts offered downbeat commentary as well.
Those at Jefferies have an underperform rating and a $50 share-price target. Their Roku underperform thesis is built on three key assumptions:
1. Analysts’ 2024 revenue estimates “are likely too high, as they don't factor in the tough second-half comparisons, particularly in streaming services distribution revenue,” the analysts wrote in a commentary on May 2.
2. There’s “intensifying competition in ad-supported streaming.” New players such as Amazon Prime Video could hurt Roku's owned and operated advertising properties like the Roku Channel.
3. Pressure on media and entertainment spending, Roku’s biggest advertising source, is unlikely to reverse soon, as streaming companies further prioritize profitability. “We worry that ongoing weakness in M&E could delay Roku’s ability to achieve GAAP profitability,” the analysts said.
GAAP stands for generally accepted accounting principles. These are a company’s official earnings. Companies often report adjusted earnings too, which can paint a prettier picture than GAAP earnings due to excluding one-time items and other expenses, such as stock-based compensation.
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Among other analysts, Wells Fargo kept its underweight rating on Roku but raised its target price to $52 from $45.
However, while the first quarter beat Wells Fargo’s expectations, it still “thinks accounts face meaningful second half and 2025 disruption, which will lead to higher cost and less profit than the Street expects,” according to The Fly.
Cathie Wood’s buys $40 million more stock
On the buy side, famed exchange-traded fund (ETF) manager Cathie Wood went the other direction. Her Ark funds purchased 715,644 shares of Roku on April 26, valued at $40.3 million as of that day’s close. That bloc appreciated to $42.4 million as of May 2.
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Wood has snapped up Roku regularly in recent weeks as it has dropped. She often doubles down on her favorite holdings if their share prices fall.
Roku shares have tumbled 35% this year amid intense competition in the streaming industry.
However, the stock has firmed by 5% over the past 12 months, which could signal underlying strength. Roku represents the third biggest holding in Wood’s flagship Ark Innovation ETF (ARKK) .
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