Streaming is far from the latest trend on Wall Street, but in a still-developing market, any new kid on the block can become a main player. Since it’s IPO in September 2017, TV streaming company Roku, Inc. has seen steady, while sometimes interrupted growth to shake up the industry on its road to profitability as Roku gains power as the king of streaming TV.
“We are just starting to witness the massive transition of TV viewing and TV advertising to streaming. Roku is leading the way on the technology front with an operating system that is purpose-built for TV – versus more heavyweight mobile operating systems,” says the company.
Shares of Roku stock have been drastically oversold following the company’s most recent earnings report. Although the company reported estimate-beating earnings on Wednesday, the stock has experienced a selloff of around 30 percent.
“Roku delivered outstanding financial and operating results in Q3 2018. Robust active account and streaming hour growth contributed to another great quarter with our advertising business showing continued strong momentum. In fact, roughly two thirds of the Ad Age 200 have advertised on the Roku platform. Advertising effectiveness and measurement tools are consistently showing the superiority of OTT video ads on Roku compared to linear TV advertising,” said the company in a letter to shareholders.
The selloff was likely a result of missing expectations on its large-margin platform revenue. The company reported $4.56 average revenue per user, a key metric for Wall Street.
According to some analysts, the steep drop in share price is an overreaction to the news, especially considering the company’s estimate-beating Q4 guidance of $255 million to $265 million.
“Management indicated that this quarter, video ad sales more than doubled, and have been consistently strong for several quarters,” wrote William Blair analyst Ralph Schackart. “Content distribution, which includes revenue sharing from SVOD [streaming video on demand] and TVOD [TV on demand] purchases on the platform, is a little lumpier due to revenue recognition and grew closer to account growth.”
The company currently has a consensus one-year target estimate of $67.67, representing around a 50 percent upside from the current share price of $43.94. Wedbush analyst Michael Pachter has a target estimate in line with the consensus at $65.
“We continue to believe in Roku’s growth potential and that the company will, in fact, reach profitability as early as next year,” wrote Pachter in a note to investors. “Therefore, we think the recent pullback in Roku’s share price presents a compelling opportunity to build a position.”
However, many analysts are more bullish on the stock. KeyBanc Capital Markets analyst Evan Wingren currently has an $81 price target on the stock, representing around 100 percent year-over-year growth expectation.
“Despite the deceleration, we believe that ad-supported adoption of streaming clearly continues to ramp above expectations,” Wingren said. “In fact, we believe vMVPD adoption has been significant enough to drive subscriber growth for the traditional media sector. This is a long-term bullish signal for Roku, as continued growth in ad supported streaming consumption will ultimately trickle down to the platform and The Roku Channel, in our view.”