Roku (ROKU) PT Raised to 'Street High' $150 at Needham & Company; Prefers Over Netflix (NFLX)

Needham & Company analyst Laura Martin raised the price target on Roku Inc. (NASDAQ: ROKU) to a 'Street High' $150.00 (from $120.00) while maintaining a Buy rating after looking at the strategic positions of Roku versus Netflix (NASDAQ: NFLX).

Key take-aways from this report include:

a) given similar valuations, we prefer Roku to NFLX;

b) Roku’s value proposition to advertisers is growing;

c) SVOD rev shares represent upside to Roku estimates in 2020 and 2021;

d) Roku is the dominant internet aggregator for streamed TV & movie content, like YouTube is for user generated content, at about 1/20th the valuation.

Comparing Roku to Netflix:

• TAM. In 2018, US linear TV revenue was about $150B, of which about $80B was subscription fees paid by consumers to MVPDs and vMVPDs, plus about $70B was ad revenue.
• Single Revenue Stream. The vast majority of streaming services to date have chosen to either charge a subscription fee OR give consumers free programming, supported by advertising. Roku’s focus is on free content, supported by ad dollars. Netflix is competing for subscription dollars.
• Valuation. Both Roku and NFLX are currently valued at about 8x EV/2020E revenue, by our estimates. Which is the better way to participate in OTT growth?
• Netflix’s Hunger Games. Netflix targets the subscription piece of the US TV ecosystem pie. Over the next 12 months, AT&T’s WarnerMedia, Comcast’s NBCUniversal, Walt Disney, and Apple will all release new streaming services in the US to compete with Netflix, Amazon Prime, CBS All Access, Hulu, etc. The best SVOD question is: “How many SVOD services will the average US home take?” At 60mm paid US subs at 6/30/19, NFLX has the most to lose unless you believe that US homes will add 3, 4 or 5 new SVOD services. Parks Associates found 28% of consumers said they have subscribed to a streaming service to check out a single title. By implication, NFLX’s subs will (at least) churn out for a few weeks during the promotional period of each new SVOD service launch. We estimate NFLX’s US streaming revenue in 2019 will be about $9.2B, which is at risk if they don’t win.
• Roku Aggregates all OTT services, both ad-driven and SVOD. It is an arms dealer. It is indifferent about which OTT services or business models win. Roku negotiates a 20-30% rev share from every OTT service that wants access to its 30mm homes. At 3.5 hours/day/household of viewing in 2Q19, it would be impossible (our word) to launch a new OTT services without access to Roku’s 36% of connected TV homes. Roku’s goal is to convince advertisers which spent $70B on TV in 2018 to move some of their money to connected TVs and/or Roku. We estimate that Roku’s 2019 ad revenue will be $550mm, suggesting a long growth runway, if successful.

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