This Analyst Sees Scope for Upside in Roku Stock

The AdTech space is feeling the heat of lowered spend as companies come to grips with inflation and a shaky macro climate. Needham’s Laura Martin says the “deteriorating ad environment” is behind her recent lowering of estimates for those operating in the connected TV (CTV) segment. Therefore, heading into Roku’s (ROKU)’s Q2 earnings (July 28th), the analyst heeds caution.

However, Martin thinks that Roku has the potential for an additional revenue stream from elsewhere – namely by making use of its data troves.

“We calculate that selling its 1st party CTV data to 3rd parties could add nearly 3% to revs and 30% to EBITDA, without hurting its 1st party data competitive advantage with advertisers,” Martin explained. “More importantly, it would add Roku to the conversation about what a CTV currency should measure.”

Let’s see how Martin reached that conclusion.

Vizio is one of two companies (along with LG) which currently dominate CTV currency. By selling its “glass-level” CTV viewing data to 3rd parties such as Nielsen, comScore and iSpot.tv, Vizio generated almost $60 million of data revenue in 2021, based on 20 million Vizio TVs. This suggests that per each Vizio TV, it made $3.

As Roku saw out Q1 with an installed base of 61 million active accounts, of which 35 million (i.e., 57%) are televisions, at $3/year x 35 million TVs, Roku could generate $105 million a year from data – or almost 3% of its total revenue haul.

Although Roku has previously said it uses its “best-in-class” CTV data to capture advertisers, and therefore doesn’t sell it, Martin thinks this issue can resolved by either: “a) selling its data ONLY to iSpot.tv or another pure CTV measurement company, who then aggregates it with Vizio and LG data so no one can identify Roku’s-stand alone data; or b) Roku could sell a subset of its data, such as only TCL TVs, or sell just 50% of its data metrics while its ad clients benefit from using all 100%, etc.”

In any case, the analyst thinks the pros trump the cons. First off, there are a number of companies vying to replace Nielson as the “CTV and linear TV currency.” Because Vizio sells CTV data to everyone, its idea of what counts most for CTV measurement is becoming established. But Roku has the potential to permanently change how CTV currency is defined and assessed because it is twice as big. In two years, Roku won’t be able to alter CTV currency metrics.

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Secondly, while selling the data will only add 3% to 2022 revenues, Martin estimates its margins are “enormous” – in the 80% vicinity. As such, it could provide an extra $85 million to EBITDA compared to the just below $300 million Martin currently forecasts for 2022, amounting to “material upside” of 28%.

All told, Martin sticks with a Buy rating, backed by a $205 price target, suggesting shares have room for 110% gains in the year ahead. (To watch Martin’s track record, click here)

Overall, there are 23 reviews on record for ROKU, including 17 Buys, 5 Holds and 1 Sell, giving the stock a Moderate Buy rating from the analyst consensus. The shares are currently priced at $97.53 and have an average price target of $146, making the upside potential for the year ahead ~50%. (See Roku stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.