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Roku Inc. is gearing up for a platform monetization sprint, and investors are starting to tune in. After a strong showing at the JPMorgan U.S. All Stars Conference in London, Roku's management has made one thing crystal clear: it's all about accelerating platform revenue growth.
Shopify Integration Boosts Roku Ads Manager
Roku has launched Roku Ads Manager, a self-service CTV performance solution featuring the first-ever Shopify Inc integration for shoppable campaigns. This new platform is designed to help direct-to-consumer brands of all sizes easily purchase CTV video ads, offering a familiar buying experience similar to search and social.
Louqman Parampath, Roku's VP of Product Management, emphasized the platform's advantage: "Roku Ads Manager is uniquely positioned to offer data, optimization, and ad formats that no other CTV self-serve solution has." The integration with Shopify enhances reach for merchants, creating a new sales channel with shoppable ads.
Roku Management Doubling Down On Partnerships
With management doubling down on third-party partnerships and home screen changes, the streaming giant is eyeing a revenue boost that could turn heads as early as the fourth quarter of 2025. Partnerships with The Trade Desk Inc are also nearing completion, positioning Roku for potential ad revenue growth.
While Roku's CFO Dan Jedda and IR head Conrad Grodd laid out the company's priorities, the spotlight was on how Roku plans to balance revenue expansion with profitability. With platform growth initiatives set to be funded by reallocating existing operational expenses (nearly $2 billion in 2024), Roku is aiming to keep its spending lean.
This belt-tightening has led JPMorgan's Cory Carpenter to raise his price target on Roku from $80 to $90, citing increased confidence in the company's ability to grow earnings without breaking the bank.
Needham’s $100 Price Target Adds More Fuel To The Fire
Adding to the optimism, Needham has upgraded Roku’s price target to $100, reiterating their Buy rating. Analyst Laura Martin emphasized Roku’s strong strategic position in the U.S. over-the-top (OTT) and connected-TV (CTV) ecosystems.
With Roku devices now in 50% of U.S. broadband homes, the company is the largest streaming distribution platform, making it highly attractive to advertisers.
According to Needham, Roku benefits from a total addressable market (TAM) of around $62 billion in traditional linear TV advertising revenue for 2023. Roku's impressive cost control and tactical moves to become an “arms dealer” of streaming—similar to how Apple's iOS platform operates—reinforce Needham's bullish outlook.
This potential, combined with its large CTV ad inventory and projected industry growth of 15-17% in 2024, paints a picture of significant valuation upside.
Technicals Point To A Strong Bullish Run—For Now
On the technical front, Roku is flashing bullish signals, with its stock price of $74.67 above key moving averages.
Chart created using Benzinga Pro
However, some selling pressure indicates a possible risk of bearish movement in the near future, so cautious optimism might be the best approach.
Read Next:
Photo: Shutterstock
Latest Ratings for ROKU
Date | Firm | Action | From | To |
---|---|---|---|---|
Feb 2022 | Morgan Stanley | Maintains | Underweight | |
Feb 2022 | Benchmark | Maintains | Buy | |
Feb 2022 | Guggenheim | Maintains | Buy |
View More Analyst Ratings for ROKU
View the Latest Analyst Ratings
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
When deciding whether to buy, sell, or hold a stock, investors often rely on analyst recommendations. Media reports about rating changes by these brokerage-firm-employed (or sell-side) analysts often influence a stock's price, but are they really important?
Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let's see what these Wall Street heavyweights think about Shopify (SHOP).
Shopify currently has an average brokerage recommendation (ABR) of 1.83, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 42 brokerage firms. An ABR of 1.83 approximates between Strong Buy and Buy.
Of the 42 recommendations that derive the current ABR, 24 are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 57.1% and 2.4% of all recommendations.
Brokerage Recommendation Trends for SHOP
The ABR suggests buying Shopify, but making an investment decision solely on the basis of this information might not be a good idea. According to several studies, brokerage recommendations have little to no success guiding investors to choose stocks with the most potential for price appreciation.
Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every "Strong Sell" recommendation, brokerage firms assign five "Strong Buy" recommendations.
In other words, their interests aren't always aligned with retail investors, rarely indicating where the price of a stock could actually be heading. Therefore, the best use of this information could be validating your own research or an indicator that has proven to be highly successful in predicting a stock's price movement.
With an impressive externally audited track record, our proprietary stock rating tool, the Zacks Rank, which classifies stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), is a reliable indicator of a stock's near -term price performance. So, validating the Zacks Rank with ABR could go a long way in making a profitable investment decision.
ABR Should Not Be Confused With Zacks Rank
In spite of the fact that Zacks Rank and ABR both appear on a scale from 1 to 5, they are two completely different measures.
The ABR is calculated solely based on brokerage recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model allowing investors to harness the power of earnings estimate revisions. It is displayed in whole numbers -- 1 to 5.
It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of their employers' vested interests, these analysts issue more favorable ratings than their research would support, misguiding investors far more often than helping them.
In contrast, the Zacks Rank is driven by earnings estimate revisions. And near-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.
In addition, the different Zacks Rank grades are applied proportionately to all stocks for which brokerage analysts provide current-year earnings estimates. In other words, this tool always maintains a balance among its five ranks.
Another key difference between the ABR and Zacks Rank is freshness. The ABR is not necessarily up-to-date when you look at it. But, since brokerage analysts keep revising their earnings estimates to account for a company's changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in indicating future price movements.
Is SHOP Worth Investing In?
In terms of earnings estimate revisions for Shopify, the Zacks Consensus Estimate for the current year has remained unchanged over the past month at $1.12.
Analysts' steady views regarding the company's earnings prospects, as indicated by an unchanged consensus estimate, could be a legitimate reason for the stock to perform in line with the broader market in the near term.
The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Shopify. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here
It may therefore be prudent to be a little cautious with the Buy-equivalent ABR for Shopify.
Zacks Investment Research
Shopify (SHOP) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.
Over the past month, shares of this cloud-based commerce company have returned -2.1%, compared to the Zacks S&P 500 composite's +1.5% change. During this period, the Zacks Internet - Services industry, which Shopify falls in, has lost 2.9%. The key question now is: What could be the stock's future direction?
While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.
Earnings Estimate Revisions
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.
We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For the current quarter, Shopify is expected to post earnings of $0.27 per share, indicating a change of +12.5% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
For the current fiscal year, the consensus earnings estimate of $1.12 points to a change of +51.4% from the prior year. Over the last 30 days, this estimate has remained unchanged.
For the next fiscal year, the consensus earnings estimate of $1.32 indicates a change of +18.5% from what Shopify is expected to report a year ago. Over the past month, the estimate has remained unchanged.
Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Shopify is rated Zacks Rank #3 (Hold).
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Revenue Growth Forecast
Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.
For Shopify, the consensus sales estimate for the current quarter of $2.11 billion indicates a year-over-year change of +22.9%. For the current and next fiscal years, $8.62 billion and $10.31 billion estimates indicate +22.2% and +19.6% changes, respectively.
Last Reported Results and Surprise History
Shopify reported revenues of $2.05 billion in the last reported quarter, representing a year-over-year change of +20.7%. EPS of $0.26 for the same period compares with $0.14 a year ago.
Compared to the Zacks Consensus Estimate of $2 billion, the reported revenues represent a surprise of +2.03%. The EPS surprise was +30%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.
Valuation
No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.
Comparing the current value of a company's valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Shopify is graded D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
Conclusion
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Shopify. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.
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