Shares of Roku Inc. were on track Thursday for their largest single-day percentage drop since the company went public after it missed expectations on a few key financial metrics, but analysts are as upbeat as ever about the company’s prospects.
Roku ROKU, -18.79% on Wednesday beat top- and bottom-line estimates with its third-quarter results, though the company’s platform revenue of $100.1 million came up about $3 million shy of the FactSet consensus. Roku’s platform segment, which includes advertising and licensing revenues, is a fast-growing business that’s of keen interest to investors.
The company also reported $4.56 in average revenue per user, which represented a slight deceleration and came as a disappointment to some investors.
Shares are currently down 18.5% in Thursday’s session. A drop of more than 17.7% at the close would constitute Roku’s worst one-day stock performance. The company has been public since September of 2017.
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Needham analyst Laura Martin defended the stock after earnings, writing that platform revenue was impacted by “lumpy” factors and that the metric doesn’t reflect the overall health of Roku’s ad business. She also argued that average revenue per user is being affected by the growth of the Roku Channel, a curated, ad-supported hub for content.
The Roku Channel has given Roku greater access to ad inventory, according to Martin, though it’s changed the way the company approaches ad revenues. Prior to the Roku Channel’s emergence, the company sold ads at a lower cost but kept all of the revenue, she said. Now, Roku has a larger ad inventory and charges more for spots, but shares revenue with the content owner.
This suggests higher overall revenue and earnings before interest, taxes, depreciation, and amortization but lower average revenue per user, Martin said. She rates the stock a buy with an $85 price target.
William Blair analyst Ralph Schackart called Thursday’s selloff an “overreaction” given encouraging momentum across Roku’s business, and he echoed some of Martin’s thoughts regarding chief investor concerns.
“Management indicated that this quarter, video ad sales more than doubled, and have been consistently strong for several quarters,” he wrote. “Content distribution, which includes revenue sharing from SVOD [streaming video on demand] and TVOD [TV on demand] purchases on the platform, is a little lumpier due to revenue recognition and grew closer to account growth.”
Schackart has an outperform rating on the stock.
Read: Roku’s free Netflix competitor could be worth $1 billion and attract buyers, analyst says
Wedbush analyst Michael Pachter likewise maintained his outperform rating on the shares, though he admitted that Roku’s latest beat wasn’t as convincing as past ones and that the company didn’t increase its full-year outlook by as much as it has typically done.
“We continue to believe in Roku’s growth potential and that the company will, in fact, reach profitability as early as next year,” wrote Pachter, who kept his $65 price target intact. “Therefore, we think the recent pullback in Roku’s share price presents a compelling opportunity to build a position.”
KeyBanc Capital Markets analyst Evan Wingren wrote that Roku’s “key growth components” of ad-revenue and active-account growth looked impressive during the quarter. He highlighted that streaming hours also grew faster than expected.
He rates the stock at overweight with an $81 target price.
Analysts remain generally optimistic about Roku shares. Of the 13 analysts tracked by FactSet who cover the stock, nine have buy ratings and four have hold ratings. The average price target is $67.67, about 40% above current levels.
Roku shares are up 155% over the past 12 months, though they’re down 7% year to date. The S&P 500 SPX, -0.14% has gained 5% so far in 2018.
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