Why do analysts still see upside in Roku's stock?

Roku’s [ROKU] stock continues to spiral in 2022, yet some think the firm has enough tailwinds to turn its fortunes around.

The maker of smart TVs and streaming players is expanding into emerging markets and its advertising-based business model could give it protection from a slowdown in growth - something that streaming-providers like Netflix [NFLX] lack.

As it expands into other markets, and develops partnerships, can Roku compete with tech giants? Is it time for investors to buy the dip, or sell before the share price plummets further?

Analysts cut price targets on Roku’s stock, but see upside

Roku’s share price is down over 31% since the start of the year, closing Tuesday at $155.86. Over a 12-month timeframe, those losses look even worse with the share price falling Y. But analysts still see upside in Roku’s stock, even if some did trim their price targets in January.

Jason Bazinet at Citi cut his price target on Roku from $410 to $275, but maintained his Buy rating on the stock. In a research note, the analyst says that companies making money from subscriber-based business models have underperformed the S&P 500, but suggests that the current price tag isn’t factoring subscriber growth beyond 2023. Bazinet also upgraded his rating on Netflix stock in January, telling CNBC that after collapsing the stock’s price now factors in zero subscriber growth.

Over at Deutsche Bank, Jeffrey Rand has reduced his price target from $400 to $300. Like Bazinet, the analyst still has a Buy rating on the stock, telling investors in a note that the recent selloff could be overdone. The analyst points to fourth quarter earnings due 17 February as a potential catalyst for growth in Roku’s share price.

KeyBanc’s Justin Patterson also lowered his price target on Roku’s stock in January, going from $430 to $325. The analyst cited problems in supply chains that could impact subscriber growth in the first half of the year.

While price targets are being trimmed, they still represent a substantial upside to Roku’s share price. Bazinet’s $275 target would see a 76.4% upside on Tuesday’s close. Looking at the fundamentals, Roku’s share price trades at a 76.82 forward price to earnings ratio, which is toppy and makes it vulnerable in a market environment where growth stocks are getting punished.

Fourth quarter earnings due 17 February will be a key date to look out for. Already, Wall Street is expecting a decline with earnings expected to come in at $0.07 a share, down from $0.49 seen in the same period last year. However, revenue is pegged at $896.54m, which would deliver a 38% year-on-year increase.

Some analysts have already revised their expectations for audience growth, with Michael Morris of Guggenheim now expecting additional active accounts to number 2m in the fourth quarter, down from a previous 2.5m.

Roku itself is guiding for revenue of between $885m and $900m and has said that "global supply chain disruptions will likely continue into 2022".

In the third quarter, Roku’s active account subscribers stood at 56.4m, a net increase of 1.3m from the second quarter of 2021. Revenue came in at $680m, and while this missed analyst expectations, it was still up 51% year-on-year. The bulk of the money came from platform revenue, which grew 82% year-on-year to $583m, while revenue from its streaming players accounted for $97.4m, down 26% decline year-on-year.

Tailwinds for Roku’s stock

Roku is often discussed in the same breath as Netflix, but the two business models are different. Roku makes most of its money from advertising revenue, and, as a supplier of streaming players and smart TVs, isn’t solely dependent on subscriber revenue - just take a look at the contribution its platform business made to third quarter results. According to Larry Ramer, writing on InvestorPlace, a better comparison would be to a company like Alphabet [GOOGL] which makes most of its money from advertising.

For Ramer there are a number of reasons for investors to be optimistic about Roku. The first is that it is the biggest smart TV streaming platform in the US. Then there is the planned expansion of its ad business into Mexico - a country where streaming is increasingly becoming the norm. Part of this will be to team up with Entravision Communications to help identify brands who want to advertise on Roku.

“We look forward to working directly with brands and content providers to reach even more consumers through TV streaming in Mexico,” Mirjam Laux, Vice-President of International Platform at Roku, said in a statement.

In the shareholder letter accompanying third quarter results, Roku said it expected investment in people and its product to drive future growth, even if it increased operating expenses. However, it also said that ‘the secular shift to streaming’ caused by the pandemic ‘remains intact’. With the current falls in Roku’s stock, married to the upside analysts are seeing, now could be a good buying opportunity.