Roku’s rocking 2019 … so why was its stock downgraded?
Roku’s shares fell more than 3.5% on Tuesday after the company was downgraded by RBC Capital Markets. RBC lowered Roku’s rating from outperform to perform but held the company’s $90 price target.
This is somewhat surprising, given that Roku has massively outperformed in 2019. The company’s shares have risen 200% since the beginning of the year. In comparison, the S&P 500 has grown by a more modest 18%.
So what’s the deal? Here’s what you need to know…
3 Things to Know About Roku
Here are three things investors should know about Roku…
The company accounts for 30% of smart TV sales
Of all the smart TVs sold during the first quarter, one in three had Roku OS installed. This means that Roku accounts for 30% of the market for streaming devices.
And the company accounts for more than 15% of all streaming devices used in the U.S. This means Roku beats out competitors like Microsoft, Samsung, Alphabet, and Amazon. Sony is Roku’s biggest competitor and according to some estimates, Roku will lead the company by 70% by the end of the year.
Roku generates a lot of revenue from advertising
One of Roku’s strongest assets is the revenue it generates from advertising on its platform. Mahaney said that Roku is in a good position to take advantage of “the very large, underpenetrated $70-billion TV ad spend opportunity.”
And unlike other streaming services, Roku can be seen as more of a partner than a competitor. In the coming year, Roku should benefit from the addition of new streaming services like Apple TV and Disney+.
Roku has strong user engagement
About half of Roku’s customers are also Roku TV users and that figure should only continue to increase. This allows Roku to build a strong and engaged customer base.
The amount of time Roku TV users spend streaming has increased for the past five quarters straight. The average Roku customer spent about 3.5 hours per day streaming during the first quarter.
Final thoughts
RBC analyst Mark Mahaney acknowledged the company’s strong growth but said the company has a “less attractive risk-reward” outlook. Mahaney’s point is that since the company’s shares are trading so high, it’s time for a downgrade.
However, if Roku can maintain its strong customer engagement, revenue, and TV sales, it should be able to maintain this growth going forward.
