Shares of streaming services provider Roku (NASDAQ:ROKU) have plunged more than 37% year-to-date on concerns over profitability, slowdown in certain key metrics, and growing competition. While the company exceeded analysts’ first-quarter estimates, management cautioned investors about tough comparisons in Q2 within its streaming services distribution activities. Given this backdrop, Wall Street is divided on Roku’s prospects.
Roku’s Q1 Performance
Roku’s first-quarter revenue grew 19% to $882 million, thanks to a 14% rise in the number of streaming households to 81.6 million and a 23% increase in streaming hours to 30.8 billion. However, ARPU (average revenue per user) was almost flat at $40.65. The company reported a narrower-than-anticipated loss of $0.35 per share compared to a loss of $1.38 per share in the prior-year quarter.
Management highlighted that streaming hours surpassed 30 billion hours for the first time in a single quarter, indicating strong engagement. Moreover, engagement per account also improved, with streaming hours per streaming household growing to 4.2 hours per day in Q1 2024 from 3.9 hours in the prior-year quarter.
While Roku delivered the third consecutive quarter of positive adjusted EBITDA and free cash flow, investors remain concerned about the company achieving GAAP profitability consistently. Moreover, the company cautioned that it expects to face tough growth rate comparisons in Q2 within its streaming service distribution activities due to previous price increases and the shift to cheaper ad-supported offerings.
Analysts’ Opinions
In early May, Jefferies analyst James Heaney initiated coverage of Roku stock with a Sell rating and a price target of $50.
The analyst contended that the estimates for the second half of 2024 and 2025 seem too high due to several headwinds, including challenging comparisons in the streaming services distribution business, growing rivalry from emerging players, like Amazon (NASDAQ:AMZN) Prime Video, and persistent weakness in media and entertainment ad spend.
In contrast, Needham analyst Laura Martin reiterated a Buy rating on Roku stock with a price target of $100 following meetings with the management at the 19th Annual Needham Technology & Media Conference in New York. Among the major takeaways, the analyst noted that free cash flow is Roku’s “North Star,” as the growth in this metric is a proxy for ROIC (Return on Invested Capital) improvement and could drive the upside in the share price.
The analyst also noted that Roku’s focus over the next 1-2 years will be on accelerating Platform segment revenue growth through various initiatives, including boosting active accounts and growing the number of SVOD (subscription video on demand) subscriptions. The company also aims to drive increased monetization of the Roku home screen by creating new types of ad units and personalizing home screen content recommendations.
Is Roku, a Buy, Sell, or Hold?
With eight Buys, seven Holds, and three Sells, Roku scores a Moderate Buy consensus rating on TipRanks. The average ROKU stock price target of $74.88 implies 30.5% upside potential.
Conclusion
Analysts who are bullish on Roku expect it to benefit from the cord-cutting phenomenon and the shift in ad dollars from traditional TV to online streaming. However, critics are concerned about the company’s ability to improve profitability amid rising competition. Overall, consistent growth trends and improvement in profitability metrics in the quarters ahead could help the stock rebound.
