Roku Slips on Netflix Dive, Plans for Recovery

Out of the horde of competitors eagerly pursuing the streaming video market, one of the great dark horses of the field was probably Roku (ROKU). Roku dealt in not only streaming video but also in hardware, making it a cradle-to-grave approach to the streaming video market.

After the Netflix (NFLX) stock crash (currently down over 35%), Roku—like most other streaming platforms—lost ground in Wednesday’s premarket. However, it started to make up some of that lost ground in today’s trading session, and its sheer range of options leaves me bullish on the company going forward.

Roku has lost a lot of its value over the last year. Late June into brief patches of August saw the company break $400 a share. Afterward, the company began a decline that is essentially continuing to this day.

The latest news is a mixed bag for Roku. Netflix’s cataclysm hit Roku in a kind of negative halo effect, which also went so far as to hit Disney (DIS) and similar streaming services. However, Roku is already planning for its comeback with the announcement of its “clean room” service.

The Roku clean room allows advertisers better access to metrics without needing to depend on cookies or similar tricks. With the clean room tools, advertisers can access audience data directly and better test and measure ad campaigns. Several agencies are already putting the clean room systems to work, including Omnicom (OMC), Horizon Media, and more.

Wall Street’s Take

Turning to Wall Street, ROKU stock has a Moderate Buy consensus rating. That’s based on 16 Buys, one Hold, and three Sells assigned in the past three months. The average Roku price target of $181.40 implies 61.6% upside potential.

Analyst price targets range from a low of $95 per share to a high of $305 per share.

Investor Supports Prove Somewhat Mixed

Among investors, support for Roku is oddly mixed. There will be some bright spots and some downsides to consider in supporting Roku purchases.

First, there are hedge funds to consider. The TipRanks 13-F Tracker reveals that hedge funds have increased their stakes in Roku to levels not seen since December 2020.

The time between September 2021 and December 2021 saw hedge fund stakes increase from around 5.238 million shares to around 6.424 million shares. By way of comparison, December 2020 saw stakes of 6.435 million shares.

Insider trading, meanwhile, suggests that insiders are abandoning the company quickly. There has been some buying activity every month since May 2021. However, in most cases, it has been matched, or even overmatched, by selling. The last time buyers led sellers at Roku was in May of 2021, when 11 buyers outpaced 10 sellers.

Retail investors are getting out as well. In the last 30 days, portfolios that held Roku were down 1%. In the last seven days, meanwhile, they were down 0.3%. Meanwhile, Roku’s dividend history bears no close scrutiny, as no dividend has yet been offered, nor are there plans to do so any time soon.

Fighting the Good Fight Tooth and Nail

Roku suffers a bit when it comes to streaming video because it doesn’t have the connections that other major studio operations do. While Roku is working to change that, such change won’t happen quickly.

Roku has an impressive reach. By some reports, Roku has over 60 million active accounts on its side. That’s one monster pool of viewers and potential subjects for advertisers to reach. That’s also likely a lot of the reason that Roku is focusing on things like the clean room system to maximize advertiser tailoring.

Tailored advertising has the best chance of producing returns since it’s the least likely form of advertising to be outright ignored by its targets.

Yet Roku also faces some significant problems going forward. The combination of HBO Max and Discovery+ will take some wind out of Roku’s sails. Roku made good money on HBO Max subscriptions, but with HBO Max increasingly able to stand on its own, that particular revenue could face a decline.

Losing access to other platforms’ content will force Roku to pursue more original content that it alone controls. Roku’s recent acquisition of the Quibi library will help here, but that help will only go so far. Roku has over 50 original shows in development as of December 2021, reports note, but can these shows land on the service soon enough to make a difference?

Concluding Views

Give Roku credit here; it’s working frantically to bring out content that only it controls. That’s good news for a platform that depends heavily on other platforms’ content in an age where platforms are easier to access than ever before. Roku’s work as an aggregator won’t be especially valuable going forward.

Consider, however, that Roku is also working just as hard to make its content palatable to advertisers. That’s likely to ensure its current income streams because even as Netflix considers an ad-supported tier, Roku is rolling out the red carpet for advertisers.

Roku is trading near its lowest price targets, and it’s got quite a bit of support from hedge funds. That results in a potentially solid investment. I’m bullish right now on a platform that’s working this hard to keep afloat. However, even I’ll be watching this one carefully to see if all that original content can’t produce solid returns.

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