Investing.com – Wolfe Research has upgraded its rating Year (NASDAQ:NASDAQ:) outperformed Peer Perform in a note Thursday, with a $93 price target, citing an improved outlook for the company's sales growth and profitability.
The company acknowledged concerns around connected TV (CTV) ad sales, but said it believes Roku is positioned to accelerate its growth, benefiting from its leadership in the CTV space and an increasing focus on monetization.
“Roku's fundamental risks are receding while its sales growth is poised to accelerate,” Wolfe Research said. “ROKU's 2.1x market value/sales understates the company's leadership in CTV operating systems and its free cash flow potential.”
Roku's perceived risks (such as its beta version above 2.0 and its evolving business model) are diminishing as the company trims its cost structure and refines its sales strategies, according to the firm.
Wolfe says Roku has successfully defended its position in the CTV market, with more than 40% of US CTV households using its platform. This, coupled with the fact that roughly half of TV viewing remains linear, gives Roku a significant advantage going forward.
They believe one of the key drivers of Roku’s projected sales growth is The Roku Channel (TRC), which Wolfe estimates will contribute $786 million in sales by 2024.
Programmatic advertising initiatives are expected to drive annual revenue growth through mid-2019, leveraging Roku’s increasingly fixed cost structure to generate significant free cash flow.
Wolfe says, “Our 8.7% EBIT margin in the 2027 high-end case results in $3.5/share of FCF after stock compensation.”
Roku's strategic partnerships, such as its expanded integration with The Trade Desk (NASDAQ:), are also expected to enhance the company's advertising sales potential by enabling programmatic buying of CTV ads.
“In this case, 'the people' are the CTV ad buyers, and 'what they want' is to buy CTV ads programmatically,” the firm adds.
With these factors in play, Wolfe Research is optimistic about Roku's long-term growth trajectory.
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