Roku's Valuation Reflects Its Advertising Opportunity, DA Davidson Says In Initiation

Roku Inc ROKU is not only a leading provider of streaming video products, but is poised to take advantage of a large shift in advertising dollars toward online video. That's not enough to justify an aggressive stance on the stock, according to D.A. Davidson. 

The Analyst

D.A. Davidson's Tom Forte initiated coverage of Roku's stock with a Neutral rating and 12-18 month price target of $30. 

The Thesis

Roku is one of a handful of companies at the forefront of the ongoing transition to over-the-top and on-demand video, Forte said in the initiation note. (See the analyst's track record here.) 

This positions Roku to benefit from the estimated $70 billion in advertising spend that will flow to online venues, Forte said. Roku should generate a compound annual sales growth rate of 30.1 percent through 2020, at which point the analyst forecast the company's margins will turn positive to 9.3 percent versus negative 0.6 percent in 2017. 

At today's levels, Roku stock already reflects a "favorable view" of the company's long-term growth potential, Forte said.

D.A. Davidson's $30 price target is based on a discounted cash flow analysis and includes the following assumptions:

• A discount rate of 11 percent.
• Discounted free cash flow in 2027 of $1.246 billion.
• Discounted terminal cash flow of $2.167 billion.
• Total discounted cash flow of $3.412 billion.
• A current net cash of $177 million.
• A total value of $3.589 billion.
• Shares outstanding in 2018: 121 million.

Price Action

Roku shares were up 0.91 percent at the time of publication Tuesday afternoon. 

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Photo courtesy of Roku.