Needham Names 4 Underappreciated Roku Valuation Drivers, 2 Overstated Risks

Following a meeting with Roku Inc's ROKU CFO Steve Louden, a Needham analyst came away increasingly confident in the bullish prospects for the streaming video company.

The Roku Analyst: Laura Martin maintained a Buy rating on Roku with a $190 price target. 

The Roku Thesis: Roku has nearly 50% of the 88 million connected TV homes in the U.S. as of June 30, and therefore will likely be the winning aggregator of streaming TV and film content apps, Martin said in a Tuesday note.

The analyst sees valuation upside for the company from its current market cap of about $22 billion.

Investors are underestimating four drivers of upside to Roku's valuation, she said: data advantages, Roku channel upside, DataXu execution and COVID-19-related trend accelerations. 

Roku is the largest CTV Walled Garden, with first-party viewership data across 3,000 streaming apps on its platforms, Martin said.

Although Roku is monetizing its first-party data only through selling targeted streaming ads at a premium, over time it will likely package and sell its data to other companies, the analyst said. 

"We think Roku's first-party data advantage is its most valuable 'hidden' asset." 

The Roku channel provides advertisement-based video on demand apps on its platforms, which are bleeding due to a decline in ad spending, with an option to put 100% of content on the channel, Martin said.

The company sells 100% of the ads, with a 50% revenue share going to the content owner, the analyst said. 

This makes it even harder for any streaming app to justify not giving TRC their content, the analyst said.

DataXu, the third value driver, added retargeting capabilities, direct response ad units, demand management software, better CTV tools and the OneView product to Roku, she said. 

It allows advertisers pay Roku only for eyeballs added, Martin said.

An acceleration in COVID-19 trends is manifesting as faster installed base growth, deeper household penetration and advertising, the analyst said. 

Needham sees the threat of TCL potentially abandoning Roku as well as the competitive threats from HBO Max and NBCUniversal's Peacock streaming service as overstated risks for Roku.

ROKU Price Action: Roku shares were trading 3.83% higher to $180.12 at the time of publication Tuesday. 

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