Guggenheim Securities upgraded Roku’s rating to “Buy” from “Neutral” on Friday, with a new price target of $75, signaling a potential upside of 21.4% from the current trading price. Following this upgrade, Roku’s shares were up by 4% in pre-market trading.
Guggenheim’s analysts are optimistic about Roku’s progress in broadening video inventory ad sales through third-party platforms and enhancing home screen monetization, which they believe will drive revenue growth into 2025.
Citi lowered Roku price target to $60 from $70
Other analysts have offered a mixed view on Roku. Earlier this month, Citi lowered its price target to $60 from $70, maintaining a “Neutral” rating.
This adjustment followed Roku’s Q2 earnings report, where the company exceeded expectations in revenue, adjusted EBITDA, and net additions, but also projected a cautious outlook for Q3. Citi’s stance reflects a balanced risk-reward scenario, underpinned by concerns about the broader challenges facing the streaming industry.
Several other firms have also revised their targets for Roku following its Q2 earnings. Pivotal Research reduced its price target to $65 from $75, citing consistent yet challenging conditions in the streaming ad market.
Similarly, Macquarie and JPMorgan lowered their targets to $72 and $80, respectively, while still maintaining positive ratings, indicating a tempered yet optimistic outlook on Roku’s potential to rebound.
Roku Q2 earnings
On August 1, Roku reported Q2 2024 revenue of $968.2 million, a 14.3% year-over-year increase, surpassing expectations by over $30 million. Platform revenue, which includes advertising, rose by 11% to $824 million.
The company also added 2 million new streaming households, reaching a total of 83.6 million, and saw a 20% increase in streaming hours to 30.1 billion. However, despite these growth figures, ARPU remained flat at $40.68, highlighting ongoing challenges in monetizing the expanding user base.
How good are Roku’s fundamentals & valuation?
The company’s recent adoption of Unified ID 2.0, an advanced identity solution, is expected to enhance its ad-targeting capabilities and improve overall advertising performance.
Roku is also expanding its advertising ecosystem through partnerships with platforms like The Trade Desk, allowing for diversified ad revenue streams.
These strategic initiatives are designed to drive growth, but the company still faces headwinds such as inflationary pressures and potential changes in consumer spending patterns, which could impact its ability to sustain growth.
Roku’s valuation metrics indicate that the stock is trading at a relatively low multiple compared to its historical averages. The company’s price-to-sales ratio is currently around 2.36x TTM, which suggests that the stock is priced reasonably for bullish investors to build a position, especially considering its growth prospects.
The sell-off in Roku shares this year has driven its market cap down to under $9 billion, even as the company continues to generate solid free cash flow, which stands at $318 million on a trailing 12-month basis.
With $2.1 billion in cash and equivalents and no significant debt, Roku’s financial position remains strong. Analysts like those at Guggenheim believe that Roku’s disciplined execution and strategic focus on monetization will eventually reflect in its stock price, making it a potentially lucrative investment at these levels.
The broader market conditions, including economic uncertainties and inflation, are likely to influence Roku’s performance in the near term. However, the company’s strategic initiatives, particularly in advertising and content distribution, position it well to capitalize on the ongoing shift from linear TV to streaming.
As we now turn to the technical analysis, it’s important to examine whether the stock’s recent price movements align with the underlying fundamentals.
Let’s analyze the charts to determine Roku’s price trajectory and assess whether the stock is poised for a potential rebound or if further downside risks remain.
Roku technical analysis: Support at $50.2, resistance above $66.7
Roku’s stock has fallen significantly from its highs above $400 in 2021. Although the stock offered a glimmer of hope to investors in 2023, bouncing from $40 to above $100, it has been a dampener this year falling to $50 a few weeks ago.
Source: TradingView
The stock remains weak on long-term charts, but investors who are bullish on the stock like analysts at Guggenheim Securities can initiate a small long position at current levels with a stop loss below medium-term support at $50.2.
If the stock sees bullish momentum materializing, they can add to their position once it crosses above its 100-day moving average.
Those who are bearish on the stock have a low-risk trade on their hands right now as it is trading close to its medium-term resistance near $66.7. They can initiate a short position near $65 with a stop loss at $68.3.
If today’s bullish momentum reverses, the stock can once again find support near $50.2 where one can book profits.
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