Why Roku Is Still A Long-Term Winner In The Streaming Wars

Roku Inc ROKU shares dropped 8% on Friday after the company reported strong first-quarter user growth but shared lackluster commentary about its ad business outlook for the second quarter.

Roku reported a 45-cent loss per share for the first quarter, in-line with analyst expectations. Revenue of $321 million exceeded consensus estimates of $307 million.

Roku also reported 39.8 million active accounts, up 37% from a year ago. Management said its ad business will continue to grow, but has been slowed by a higher-than-normal number of cancellations.

Near-Term Challenges, Long-Term Gains

Bank of America analyst Ziv Israel said the coronavirus has created near-term headwinds, but Roku’s long-term story remains intact.

“We see our thesis as largely intact driven by the long term benefits of higher engagement on the platform,” Israel wrote in a note.

Benchmark analyst Daniel Kurnos said investors should expect Roku shares to take a breather after a large run-up heading into earnings.

“That said, all of the momentum drivers, including player sales, streaming hours and new active accounts only improved in April, and we expect the current environment will still be favorable for free content aggregators unlike potential pauses in some of the SVOD channels,” Kurnos wrote.

The Rise Of OTT

Oppenheimer analyst Jason Helfstein said there’s no stopping the secular shift in advertising from linear TV to over-the-top models.

“While near-term revenue will slow dramatically on reduced advertising and sponsorship, many factors suggest Roku/OTT will emerge from COVID-19 much stronger,” Helfstein wrote.

Rosenblatt Securities analyst Mark Zgutowicz said Roku’s position as a market leader and demand for OTT video streaming suggest Roku will be a long-term COVID-19 winner.

“Roku’s dominant US brand/household positioning in OTT, and early innings globally, make it hard to bet against, even with acknowledged less than perfect financial model transparencies,” Zgutowicz wrote.

Needham analyst Laura Martin said a lack of live sports has given cord cutters a major excuse to shift to OTT streaming.

“Homes are viewing more AVOD (ie, free) content owing to higher unemployment, lower avg incomes, and potential recession, as evidenced by Roku Channel's viewing hours up >100% y/y in 1Q20, from 14mm homes with 36mm folks,” Martin wrote.

ROKU Ratings And Price Targets

• Bank of America has a Buy rating and $140 target.
• Benchmark has a Buy rating and $153 target.
• Oppenheimer has an Outperform rating and $135 target.
• Rosenblatt has a Buy rating and $145 target.
• Needham has a Buy rating and $150 target.

Roku's stock traded lower by 7.6% to $127 per share at time of publicaton.

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