Roku: 4 Reasons Why KeyBanc Recommends The Streaming Stock

Roku Inc ROKU is headed for long-term growth over a period of many years, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Evan Wingren initiated coverage of Roku with an Overweight and $42 price target.

The Thesis

The bullish case for Roku stock is fourfold, Wingren said in the initiation note. (See the analyst's track record here.)

• The ongoing transition from traditional TV toward streaming content is a long-term theme. Ad-supported streaming will see continued adoption over the long term, creating a tailwind for Roku, the analyst said. 
• Roku boasts a key differentiator compared to its rivals, Wingren said: it gives its proprietary operating system to TV original equipment manufacturers, which creates a "symbiotic relationship" that should add to the company's leadership position in TV operating system development.
• The Roku Channel is still in its early days, but has the long-term potential to develop ad-supported streaming viewership, Wingren said. Over time, legacy media companies will likely turn to Roku to capture a growing portion of library content, as it can offer variable economics to partners.
• The midpoint of Roku's 2018 guidance of 30-35 percent revenue growth and gross profit growth of 38-48 percet implies that incremental gross margins will fall from 78 percent to 50-60 percent, according to KeyBanc. A decline of this magnitude appears to be "unlikely," Wingren said. 

Roku is a "unique play" on the shift toward streaming online video, the analyst said. KeyBanc's $42 price target is based on 10x 2019 EV/gross profit, which is in-line with peers despite a higher average gross profit growth profile.

Price Action

Roku shares were up 1.2 percent at $32.93 after the open Tuesday. 

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Photo courtesy of Roku.