The Nasdaq closed lower on Thursday — its fourth down day in a row. But at least not all the news is bad. Despite the recent selloff in tech stocks, over the last six months, the tech heavy Nasdaq is still up nearly 10% over the last six months.
But not all tech stocks have been so lucky.
Over those same six months, shares of streaming television pioneer Roku (ROKU) have shed literally 65% of their value — despite the fact that last quarter for example, Roku reported a 50% year-over-year increase in revenue — and earnings growth of more than 400%!
Does that kind of disconnect between earnings growth and stock price crash make sense? Not according to Deutsche Bank analyst Jeffrey Rand,
Rand urged investors to “not change the channel” on Roku. Even as Rand bowed to reality and lowered his price target on Roku to $300 in response to the sell-off, he insisted that this sell-off in Roku stock is “overdone” — and that Roku will rise again. Indeed, with Roku shares closing just over $167 Thursday, his $300 price target implies Roku shares could gain as much as 80% over the coming year. (To watch Rand’s track record, click here)
What gives Rand such confidence in the face of intense investor pessimism?
The stock’s price weakness notwithstanding, Rand believes “Roku remains well positioned and the market leader in the rapidly growing connected TV (CTV) market.” And if Roku executes well with its business, the stock price should take care of itself.
Speaking of which, Roku will get its next chance to prove itself in February, when the company reports Q4 results. Rand believes that 4Q earnings could be a positive catalyst for the stock: “Our checks indicate that the advertising market remained strong in 4Q despite some initial concerns about brands reducing advertising spending in the quarter on supply chain issues.”
Currently, “expectations are low” for Roku in Q4, and while that sounds like bad news, it may only mean that the bar Roku must clear to positively surprise analysts has been lowered.
As Rand explains, Roku is still growing revenues “30%+” on “robust” advertising spending by its customers. While the analyst admits that in “rare cases… advertisers have pulled back [spending on Roku ads] due to supply constraints,” at the same time, other, even larger “companies that have supply and are benefitting from the strong consumer spending environment are increasing advertising spending.” The net effect of a few small companies spending less, while more and bigger companies spend more, therefore, should be enough to keep Roku’s revenues growing in Q4.
How much could Roku’s revenues grow? Rand guesses 37% in Q4 2021, and perhaps 36% in 2022 — followed by another 31% growth in 2023. And assuming he’s right about that, Roku stock currently trades for only about 4x 2023 revenues — versus the 8x revenues valuation that the analyst believes would better reflect the stock’s intrinsic value.
Among the analyst community, the majority are on Roku’s side. Factoring in 15 Buys, 2 Holds and 3 Sells, the streaming player has a Moderate Buy consensus rating. Shares are priced at $167.36, and the average price target of $339.42 suggests an upside potential of ~103% for the next 12 months. (See ROKU stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
