Oppenheimer Improves Roku Stock – Again – The Motley Fool

Every day, Wall Street analysts improve some stocks, devalue others and "throw a blanket" on a few others. But do these analysts even know what they are talking about? Today, we take a very high-profile choice of Wall Street and put it under the microscope …

It's been about 3.5 months since Oppenheimer & Co., citing a significant potential for the market. improvement, yielded to its underperforming rating against ] Roku (NASDAQ: ROKU) stock and updated to perform. During this period, Roku shares have steadily increased from $ 34 in March to $ 43 per share today – a 26% return in about 100 days.

Now, Oppenheimer is still improving Roku stock – this time to outperform.

Here's What You Need to Know

Recap of the March Update

To understand why, let's first examine why Oppenheimer, who had thought Roku's stock was too expensive, changed their minds and improved Roku in March

The reason for this update can be summed up in three words: The Roku Channel (TRC). An application available on OTT boxes (Roku over-the-top) and TVs with integrated Roku software, TRC offers free movies to Roku users and generates advertising revenue for Roku itself. As CEO Anthony Wood explained at a teleconference last year presenting his plans for TRC, "[C] users want free content, Free is one of the best search terms on our site … The Roku channel really answers this question.

Also, because Roku owns the channel rather than hosting it as a third-party application created by someone else's d & # 39; Another, with which Roku would need to share its revenues, TRC also produces better revenue and a better profit margin for Roku.Combined with the company's "automatic content recognition" technology to generate data on which viewers are watching what ads and when, it has the potential to become even more profitable for Roku over time.

So, how is this thesis constructed for Oppenheimer up to now? As you can guess with the 26% increase in Roku's stock since the March update, and there's a reason for that.

As Oppenheimer advises in its update note on StreetInsider.com (subscription required), TRC now stands for "0.63% of the time spent on Roku's platform" and attracts 9 million US dollars. average viewing hours per month, making it the "12th most-watched app by Roku in hours". Moreover, TRC achieved this goal only nine months ago, and it is logical to assume that its success will only increase as more and more people use the application.

(I own a Roku. I've never watched TRC, but now I'm starting to wonder what it's all about and what it'll probably do.) [19659004] As Oppenheimer explains, this has never been [this level of adoption] possible. "Now that he sees that it's not only possible, but that it actually occurs, Oppenheimer revisits his previous assumptions, gaining" incremental confidence "that TRC will" get the audience on from other platforms, such as Samsung, allowing Roku to monetize a larger portion of the OTT ecosystem Oppenheimer now estimates that Roku's "core platform" is worth $ 44 per share while "l & rsquo; "Off-platform opportunity Roku Channel" revenue generated by TRC placement on TVs made by other companies is worth it. The Result for Investors

There are two interesting things about these calculations, as I see them:

First, $ 44 plus $ 7 equals $ 51 per share in intrinsic value for Roku, which suggests that there may be $ 1 profit potential in Roku's action than the new $ 50 Oppenheimer price target.

Second, while Oppenheimer assigns value to Roku's "main platform" (ie everything you see on a screen), it does not attribute any specific value to the material business of Roku that produces and sells real Roku players.

On the one hand, this makes sense because the activity of the players is much less profitable (gross margin of 10%) than that of the platform (gross margin of 75%). On the other hand, although the data from S & P Global Market Intelligence confirm that the activities of Roku players do not generate any more real turnover, they still accounted for $ 287 million in sales. 39, last year. That's more revenue than platform production has produced – this must be worth something . And whatever it is, it would only add to the value of Roku's stock as a whole.

Will all this value add to Oppenheimer's $ 50 target price? Will he add to an even higher price of action than this? Until Roku becomes profitable and starts generating real free cash flow from its business, it's really hard to say. Still, analysts predict on average that Roku will become profitable next year, earning $ 0.02 per share – and then growing those profits 66 times in three years, which will bring him up to $ 25. at $ 1.32 per share in 2022.

Difficult Personally, to assign a stock value to a stock that does not currently earn, once Roku is profitable, I can see the investors pay a lot of money for acquire part of this growth rate.