Here’s Why Roku Stock Is Up 12%

Major TV streaming platforms get strong endorsements from Wall Street analysts.

Year (NASDAQ:ROKU), the leading TV streaming platform, was one of the biggest gainers on Friday, with shares up about 12% to close above $69.

It was a welcome spike for Roku investors, as the stock was down 24% since the beginning of the year and about 12% over the past 12 months.

The stock fell below $50 a share after the company reported second-quarter results on August 1. Sales were up significantly and losses narrowed, but several Wall Street analysts lowered their price targets, citing a potential second-half challenge and increased competition that could slow growth.

But one of the catalysts on Friday was an analyst upgrade, which sent the stock up about 12% that day.

Growth in advertising revenue

Roku stock gained ground after Guggenheim analyst Michael Morris raised his price target on Roku from $65 to $75 per share on Thursday. He also gave Roku a buy rating, having previously given it a neutral rating.

Morris made the change based on a couple of growth catalysts he believes are underappreciated: Roku, the leading streaming platform in the U.S., is expected to see additional growth from advertising on the platform and more original content on the platform, which will drive more traffic and advertising.

Roku has approximately 83.6 million active accounts, up 2 million from Q1 and 14% from Q2 2023.

In Q2, Roku saw a significant increase in advertising revenue, outpacing the overall advertising market. In their Q2 letter to shareholders, founder and CEO Anthony Wood and CFO Dan Jedda said the massive reach of Roku’s home screen, reaching 120 million people every day, is invaluable to advertisers.

They also said new original content is a major driver of advertising revenue.

“While the foundation of our content spend remains third-party licensing and revenue sharing, we continue to leverage Roku Originals to attract viewers and advertisers,” Wood and Jedda wrote. “For the Roku Original “The Spiderwick Chronicles,” we drove viewers across multiple entry points across the Roku platform, including the Roku home screen, Roku City, and the “Spiderwick” tile. The series achieved the highest reach and engagement in its opening weekend of any on-demand title in Roku Channel history and was sponsored by Airbnb.”

Should I Buy Roku Stock?

Roku shares also likely benefited from comments made by Federal Reserve Chairman Jerome Powell at the Jackson Hole Economic Symposium on Friday that a rate cut was coming, and he was more vocal than ever about the possibility of a rate cut.

Stocks rose on the news, especially small- and mid-cap stocks. They benefit most from lower interest rates, which reduce the cost of borrowing and investing. Roku, with a market cap of about $10 billion, falls into the small- and mid-cap range.

Roku’s median price target of $65 per share suggests a 6% downside from current prices. However, Guggenheim’s $75 per share price target suggests an 8% upside from current prices.

Roku expects third-quarter revenue growth of 11% to $1 billion, with adjusted EBITDA expected to increase to $45 million from $43.6 million in the second quarter. Net loss continued to narrow to $34 million from $107 million in the same quarter a year ago.

I am more bullish than bear on Roku and agree with Guggenheim’s outlook, but I would wait at least another quarter to see if it continues to move toward profitability. This is a stock to watch for the long term, especially if it can leverage its massive audience to generate additional advertising revenue.