Roku Inc (NASDAQ:ROKU)’s new products and features will drive enough user growth to insulate it over the near term, despite current concerns around its cash position — which may become worse following the collapse of Silicon Vally Bank (SVB).
That’s the view of analysts at Wedbush, who have maintained their ‘Outperform’ rating and $80 price target for the connected TV platform despite near-term headwinds that will likely pressure its share price.
Roku’s shares were trading 2% down at $58.74 mid-morning Monday in New York after trading as high as $65.77 last Thursday ahead of its disclosure that $487 million, or 26% of its current cash and cash equivalents are tied up in ‘largely uninsured’ SVP deposits, some of which may not be recoverable.
“Roku’s ability to recover the (SVB) cash is of course uncertain, but Roku stated that it has enough cash remaining to cover its cash requirements and contractual obligations for at least the next twelve months,” the analysts said. “Given the latest statements by the Treasury, a liquidation seems most likely, in which case Roku would recover at least some of its cash deposits. For the time being, we adjusted our model to reflect the lower available cash.”
Significant leverage
The analysts said they got a glimpse of the significant leverage Roku has in its model during the COVID-19 pandemic, with the company resuming its international expansion and launching various devices as it exited the pandemic.
“Even with a currently weak overall advertising market, Roku is taking a meaningful and growing share of shifting ad dollars coming from linear TV heading to digital TV,” the analysts wrote in a note to clients. “Once macroeconomic trends improve, Roku is poised to return to meaningful profitability as a platform and FAST channel leader.”
Despite the difficult macroeconomic environment, they noted that Roku added over 5 million active accounts in the fourth quarter of 2022 versus fewer than four million in 4Q 2021, saying its focus on driving active accounts and viewership should ultimately pay off.
“Additionally, we believe investors will ultimately reward Roku’s commitment to curtailing its spending and returning to positive EBITDA (underlying earnings) in 2024,” the analysts wrote. “That said, Roku is still spending heavily on initiatives and content that will either pay off and drive revenue growth much higher than we modeled, or Roku can significantly cut spending if it does not pan out.”
The analysts said the $80 price target is based on a 12 times multiple on their discounted 2030 earnings per share (EPS) estimate, which reflects long-term global growth ahead and significant leverage in the model once Roku takes its foot off the gas in terms of investments.
They estimate $14 billion in 2030 revenue with an 18% operating margin, discounting by 10%, to reach present value EPS of $6.75.
Contact the author at stephen.gunnion@proactiveinvestors.com