Roku: Here Are The Potential Risks And Rewards That Matter

Analysts at RBC Capital Markets don't see a bullish scenario for Roku Inc ROKU as the stock is reasonably valued in the near term after a 60-percent gain since its IPO pricing. The firm's Mark Mahaney initiated coverage of Roku's stock with a Sector Perform rating and $26 price target.

Rewards And Risks

Mahaney highlighted four positive aspects of the business, including:

1. Roku's market share of all streaming devices stands at 20 percent and almost 50 percent of all streaming hours.
2. Roku is looking to address a very large market ($70 billion) of TV ad revenue that will migrate to over-the-top technologies.
3. Roku's products are superior to competing devices in terms of software, APIs, UI, ad tech stack, billing services and data insight tools.
4. A very positive revenue mix shift profile.

But on the other hand, the following five risks can't be ignored:

1. The competitive landscape is full of tech giants such as Apple Inc. AAPL.
2. Streaming activity from Netflix, Inc. NFLX, Alphabet Inc GOOG GOOGL's YouTube and other platforms account for 50 percent of streaming hours but won't generate any material revenue for Roku.
3. Roku is unlikely to be adjusted EBITDA positive until 2018 and free cash flow positive the year after.
4. The majority of Roku's Player revenue is too concentrated and comes from just three retailers.
5. The company generates no material revenue outside of the U.S.

Combining both the positives and negatives yields a belief that Roku's stock is "appropriately balanced against investment risks" and reasonably valued at 5x 2018 price to sales.

At time of publication, shares of Roku were down 4.46 percent at $20.90.

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