Here's Why One Analyst Says Roku Is Undervalued

Roku Inc ROKU has come a long way from its trading debut price of $15.78 and it is now trading at $44.75.

The Analyst

Needham's Laura Martin reiterated a Buy rating on Roku and increased its price target from $28 to $50.

The Thesis

The analyst compared Roku to Netflix, Inc. NFLX by saying that it's a pure play on over-the-top TV viewing growth, but without content risk. (See Martin's track record here.)

Based on strong active user and ARPU growth in the third quarter, Martin said she expects Roku to reach its EBITDA break-even point in the third quarter of 2018, one quarter earlier than in her prior forecast.

Martin raised her price target for the stock for the following reasons:

• Valuation.
• Strategic position.
• Active user growth. 
• Expanding ARPUs and margins.
• Rising competitive moats.

When it comes to valuation, Netflix is the best comp to Roku, said Martin. Netflix trades at eight times 2018 expected revenue, while Roku trades at seven times. Roku is materially cheaper than Netflix, the analyst said. 

ARPU per user has risen around 50 cents each quarter so far in 2017, and the company's competitive moats are rising as its IP gets built into more TVs under exclusive multiyear deals, said Martin. Roku estimates that 20 percent of connected TVs sold in the US in 2017 will be theirs. 

The Price Action

The stock traded sharply higher in November, after the company reported better-than-expected earnings. It closed up 17.86 percent at $46.52 on Monday. 

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Photo courtesy of Roku.