The Ledger: Roku on the Rise

Greetings!

Consolidation has limited the fun you can have — and profit you can make — buying big-name media stocks. Disney, Fox and Netflix are known quantities and have been fairly consistent for years, give or take a quarter.

Which is why Oppenheimer Asset Management thinks this is the time to be investing in small- and mid-cap companies, and the one they like is Roku.

For a while, Roku’s stock was a roller coaster. The company was an early leader in streaming, manufacturing the boxes that let consumers watch Netflix and other services. The hardware business is barely profitable so it spent a lot of money building its programming and advertising businesses, a strategy that is now paying dividends. Oppenheimer expects its ad and subscription revenues to continue climbing. Other analysts note that Roku has become more disciplined and gotten costs under control. In 2021, Roku’s stock soared as high as $473 a share. A year ago, it was in the $73 range, but has risen 77% to its current level. Its market cap sits at $19.4 billion.

Meanwhile, Paramount Skydance’s push to close its mega deal to buy Warner Bros. Discovery continues. U.S. regulators were reportedly ready to approve the $110 billion takeover, despite complaints from some state attorneys general. Over the past five days, Paramount’s stock was up about 7%.

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Jon Lafayette

Jon.Lafayette@thewrap.com

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THE DEEP DIVE

Oppenheimer Names Roku a Top Stock Pick

Why Roku? According to Oppenheimer analysts Jason Helfstein, Jed Kelly and Chad Larkin, the streaming platform’s investments in monetization are bearing fruit. Those investments include third-party integrations with programmatic buying platforms and an expanded subscription offering.

Roku’s first-quarter earnings beat Wall Street estimates. Its platform revenue was 6% higher than forecasts and EBITDA outperformed by 13% as margins rose by 99 basis points.
The company recently started breaking out ad revenues as a separate metric, a sign that it’s becoming a healthy business on its own. In the first quarter, ad revenues rose 27%.
Roku’s guidance for full-year revenue growth is 21%, which is up from prior guidance of 18% and above Wall Street forecasts.

Oppenheimer rates the stock “outperform” and set a target price of $145 per share, up from $120 a share. Roku closed Thursday at 131.09, near its 52-week high of $132.80.

“We believe Roku can leverage its advantages in pricing and merchandising to remain the market leader in consumer-facing connected television solutions,” the analysts said. “However, the company is seeing near-term headwinds in its exposure to media and entertainment advertising and streaming subscription services.”

On Roku’s first-quarter earnings call, founder and CEO Anthony Wood was enthusiastic. “We delivered an outstanding quarter and are executing against our monetization initiatives,” he said. “We’re building a highly performing connected TV ad platform. And then subscription revenue grew 30%, driven by premium subscription sign-ups.”

Oppenheimer noted that the entertainment category is becoming a smaller contributor to Roku’s advertising business. “Investors should be more confident in long-term gross margin leverage as advertising is still only 55% of platform revenue,” the analyst said.

On the company’s earnings call, Roku CFO Dan Jedda said that the company has higher margin ad products coming to market. “Think of the home screen monetization. Adding video in our home screen has been very positive for us,” he said. “We’re also very efficient on how we deliver our campaigns from a gross margin standpoint. So, we have a lot of ways that we focus on overall gross margin and maximize the gross margin of the business in addition to increasing the revenue.”

Changing fortunes

Other analysts have noted the turnaround at Roku.

“Roku’s transition from a badly run, financially undisciplined, strategically adrift company into a finely tuned earnings juggernaut needs to be applauded and should serve as a model for other public companies facing similar dire straits,” said Michael Nathanson of MoffettNathanson Research.

Nathanson is just “neutral” on Roku stock, but raised his revenue and earnings estimates for the company. He also boosted his target price for Roku shares to $130 from $100. After the most recent earnings report, Nathanson said he is “incrementally more positive on the momentum in Roku’s business over the near to medium term.”

DEAL SHEET

Comscore said it agreed to sell its movie box office measurement business to Advaya Capital for $70 million in cash. Advaya said that it will return to its original name Rentrak. Advaya also said it plans to invest in Rentrak to grow its dataset and build out its analytics capabilities.
Wheelhouse acquired Anomaly Entertainment, the production company formed by former Discovery execs Matthew Kelly and Michael Sorenson, known for creating shows for Shark Week. Financial terms were not disclosed.
Trajektory, which helps teams in all of the major leagues analyze sponsorships, raised $8 million from investors including the Wilf family’s WISE Ventures. The Wilf family owns the Minnesota Vikings. Trajectory launched with a $4 million seed round in 2022. Since then, it had raised at least $7.5 million in venture capital before this new round.
Sinclair Ventures has expanded its investment in Crush Yard, which builds facilities that feature professional grade pickleball courts and high-quality food and beverage services. Sinclair Ventures owns Crush Yard’s first franchise location in Brentwood, Tenn. Crush Yard will be integrated into the pickleball content that appears on Sinclair media platforms, which include Tennis Channel.
IMAX’s share price remained elevated after jumping 15% last week because of takeover speculation. Appearing on CNBC, IMAX CEO Richard Gelfond declined to comment on potential bidders, but said the company was coming off a record year for revenue. Potential suitors range from traditional theater operators like AMC and Cinemark to Sony, Netflix or Apple. Netflix recently made a deal to have the sequel to “Once Upon a Time in Hollywood” appear in IMAX and Apple’s hit “F1” was shown in IMAX theaters.

WRAP 20 INDEX

Here’s how the companies in our Wrap 20 Index performed this week.

FINANCIAL ROUNDUP

A New Streaming Metric, and Netflix is NOT No. 1

Just when you thought that Netflix had won the streaming wars, analyst Robert Fishman of MoffettNathanson has devised a Streaming Quality Index, and Netflix ranks fourth, behind Disney+, HBO Max and . . . Apple TV.

The index ranks the seven major subscription streaming video platforms according to viewership, content demand, franchise depth, prestige and sports and live events. The better a service stacks up in those areas, the more it is able to monetize via price increase, subscriber additions, churn mitigation and advertising revenue.

The index was made necessary as the steamers pulled back on their subscriber metrics, Fishman said. “In the dark about which metrics Netflix and other streamers use to measure quality, investors are left debating how to compare engagement quality across platform,” he said.

Disney had the highest score because of “the strength of its unmatched franchise depth and sports portfolio,” Fishman said.

Perhaps the biggest surprise is Apple TV jumping to third place above Netflix despite a fraction of its scale. Likely helping our deals with Major League Soccer, Major League Baseball and Formula 1.

Amazon, Peacock and Paramount+ round out the bottom three spots.