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The Time Is Now to Buy Roku Stock

Monday, February 22, 2021 | Chris Markoch
The Time Is Now to Buy Roku (NASDAQ:ROKU) Stock

Since posting a surprising profit in its fourth-quarter earnings report, Roku (NASDAQ:ROKU) stock is continuing its spectacular rally. In the last six months, ROKU stock has climbed 217%. And after a surprising 54 cent beat in earnings per share (EPS), the stock is getting rave reviews from analysts.

If you haven’t already heard, here are the pertinent numbers from the earnings call. The company posted EPS of 49 cents above estimates for a negative earnings per share of five cents. Revenue came in at $650 million above expectations for $615 million. For the full year, Roku posted $1.8 billion in revenue beating estimates for $1.6 billion. The company also has a strong balance sheet with $1.1 billion in cash and cash equivalents.

Oh, and Roku added 14 million active accounts in the quarter bringing its total number up to 51 million.

Expect more of the same in the first quarter

Being the fickle bunch they are; analysts want to hear about the future. Historically, the first quarter is Roku’s weakest quarter in terms of revenue. However, Roku is projecting a 51% year-over-year revenue increase to $485 million. And the company is expecting to post a 40% gross margin for the quarter.

In 2020, the first quarter marked the onset of the Covid-19 pandemic. As the management team made clear on the earnings call, they attribute much of the revenue gain to come from the lack of such a disruptive event.

Watch out in the second half of the year

The flip side to saying the time is now to buy Roku suggests that there may be a time when it may not be as good. Roku management didn’t say those words on their earnings call, but it did say that growth in the second half of the year would likely not be as robust as in 2020.

The company did not issue forward guidance for the second half, but it makes sense that the numbers might decline. Roku clearly benefited from the pandemic. With limited outside entertainment opportunities, millions of viewers hunkered down and watched their favorite streaming services. The company was winning with their products (e.g. Roku TVs) and with its Roku platform.

But economists who are pointing to a “V-shaped” recovery in the second half of the year are doing so, in part, because many Americans have used the pandemic as an opportunity to pay down debt and increase their savings. At some point, that capital will get deployed somewhere. And it’s likely that it will mean less engagement with streaming services.

Banking on original content

A pleasant surprise for Roku has been the growth of its Roku channel which the company says is growing its audience at twice the rate of its platform. The company also recently purchased Quibi to add to its content library.

But the holy grail for streaming services like Roku is to develop its own content library. The time is right for Roku to make this pivot, but it will likely be costly. If the company can begin to deliver engaging original content, it’s likely the stock may exceed analysts’ lofty expectations. If it struggles out of the gate, it might send the stock falling.

The analysts love Roku stock

On February 19 alone, 7 of the 24 analysts that cover Roku stock issued a new price target for the stock. All seven significantly raised their targets, with the lowest target coming in at $400. It’s likely that more analysts will weigh in over the next week or two, which could add momentum. Roku stock pushed past $450 per share and now traders will be looking at the $487 mark. And if it makes it past that point, the stock could possibly, and perhaps likely, move to $500.

The long-term outlook for Roku is likely to depend on its success in developing original content. The pandemic will be (hopefully) a once-in-a-lifetime event. That’s why now the time to buy is. 

 

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Roku (ROKU)1.2$389.67-7.3%N/A-463.89Buy$376.54
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Did you know the S&P 500 as we know it today does not look anything close to what it looked like 30 years ago? In 1987, IBM, Exxon, GE, Shell, AT&T, Merck, Du Pont, Philip Morris, Ford, and GM had the largest market caps on the S&P 500. ExxonMobil is the only company on that list to remain in the top 10 in 2017. Even 15 years ago, companies like Radio Shack, AOL, Yahoo, and Blockbuster were an important part of the S&P 500. Now, these companies no longer exist as public companies.

As the years go by, some companies lose their luster, and others rise to the top of the markets. We've already seen this in the last few decades, with tech companies surpassing industrial and energy companies that once dominated the S&P 500. It's hard to know what the next mega-trend will be that will knock Apple, Google, and Amazon off the top rankings of the S&P 500, but we know that companies won't stay on the S&P 500 forever.

We've identified 20 companies that are past their prime. They aren't at risk of a near-term delisting from the S&P 500, but they show negative earnings growth for the next several years. If you own any of these stocks, consider selling them now before they become the next Yahoo, Radio Shack, Blockbuster, AOL and are sold off for a fraction of their former value.

View the "20 "Past Their Prime" Stocks to Dump From Your Portfolio".

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