Strong Growth Projections For Roku Lead RBC To Recommend Buying The Dip

As a company, Roku Inc ROKU is well-positioned to sustain high revenue growth over the coming years, meaning that the recent 25-percent correction in the stock should be bought by investors, according to RBC Capital Markets. 

The Analyst

Analyst Mark Mahaney upgraded Roku from Sector Perform to Outperform with a price target lifted from $48 to $70.

The Thesis

Roku deserves credit for operating a strong business with some of the best subscriber and growth metrics within the internet space, Mahaney said in the upgrade note. (See his track record here.) 

The streaming device maker growing its active accounts at a 46-percent year-over-year rate, while streaming hours are growing at a "very consistent" 58-percent year-over-year rate, the analyst said.

Nearly one in four of all new smart TVs sold in the U.S. contain Roku's technology, which makes the case for a strong platform revenue growth rate for at least the next several years, Mahaney said. 

Roku also stands to benefit from two near-term catalysts and two long-term catalysts, he said.

In the near-term, RBC's conversations with Roku management revealed improving terms such as revenue share and inventory with nearly all of its ad-supported content partners, the analyst said. The rise in popularity of The Roku Channel puts it within the top five channels in terms of active reach; since Roku owns the ad inventory, it can benefit from pricing power and better data visibility, he said. 

Over the longer-term, the company stands to benefit from an international expansion, and the The Roku Everywhere strategy could boost engagement within existing accounts and generate new ad revenue opportunities, Mahaney said. 

Roku shares are trading at 7 times 2019 estimated P/S and 5 times 2020 estimated P/S. That's not cheap, but conservative expectations for a 50-percent compound annual revenue growth rate through 2021 in the platform segment with 60-percent or higher gross margins warrants a "very premium" multiple, according to RBC. 

Price Action

Roku shares were trading up nearly 2 percent at $58.14 at the time of publication Friday. 

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Photo courtesy of Roku.