“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, July 23, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – Roku Inc. (NASDAQ: ROKU) Calls

Tuesday, July 24, 2018

** OPTION TRADE: Buy the ROKU SEPT 21 2018 55.000 CALL at approximately $2.90. Place a pre-determined sell at $5.80.

Also include a protective stop loss of $1.15.

The Los Gatos, California-based TV streaming platform Roku Inc. (NASDAQ: ROKU) has seen analysts growing more bullish on the stock amid the stock's rebound off its early April test of the $30 mark.

In September 2017, Roku shares hit the public market trading on the Nasdaq exchange with an IPO price of $14 per share. Roku's stock has gained 54% in the past three months, while the S&P 500 SPX, +0.18% have gained 4.9%.

According to one team of bulls on the Street, the Los Gatos, California-based tech company could see its value more than quadruple since garnering a $1.3 billion valuation in September, thanks to a variety of factors including a secular shift toward over-the-top TV viewing, connected TVs and Roku's growing advertising business.

In a note to clients Monday, Needham analyst Laura Martin lifted her 12-month price target on ROKU stock from $50 to $60.

Earlier this year, analysts at KeyBanc estimated the ROKU had a 35% hold over the video streaming player space, selling its operating system in about 20% of smart TVs in North America in 2017.

While much of video streaming has moved to ad-free environments, bulls on the Street are optimistic about Roku's new ad-supported Roku Channel. Needham noted that since Roku's ad business doesn't have text ads or programmatic ads, it is able to command "premium CPMs" of between $30 and $100.

She added that Roku should benefit as the streaming space becomes increasingly crowded with tech giants such as Amazon.com Inc.

This is because Roku gets a cut of revenue when consumers sign up for additional services.

Martin also highlighted "event (ie, take-over upside)," indicating that the companies that could have bought Netflix at under $10 billion "will not want to make that same mistake again by passing on Roku."

Influencing Factors…..

Results from the industry site's quarterly consumer survey show that when it comes to those looking beyond the cable box, Roku leads the pack. For the third straight year, a sampling of over 2,000 people who have cut the cord shows that more than 70% of them own a Roku device, whether it is one of its streaming devices or a Roku TV.

Roku is using its leadership position to further grow its business. Advertising is becoming one of the keys to its results, with platform revenue surpassing sales of its streaming players for the first time last quarter.

Some $70 billion is spent on television advertising each year, and Roku is anticipating it will grab a growing percentage of that, particularly after launching the advertiser-supported Roku Channel, which has quickly become one of the top 10 channels on Roku devices, based on hours streamed. Citing statistics from Nielsen, Roku says 10% of those 18 to 34 years old in the U.S. can only be reached through the Roku platform.

Beyond just video advertising, Roku display advertising is a growth channel, too. It added 6.6 million new accounts from last year -- a 1.5 million sequential increase -- giving it 21 million active user accounts, half of whom have cut the cord with cable or were never tethered to it in the first place. That suggests streaming apps will pay top dollar for landing on its home screen.

CEO Anthony Wood has been aggressive in his attempts to grow the company. Last year, the company signed deals with Philips to include Roku's technology in their smart televisions; in April, the company inked a similar deal with Sanyo. And in March, the company came to an agreement with Samsung that will bring the ad-supported Roku channel to that manufacturer's line of smart televisions.

Now, Roku's back with a new hardware deal. Roku recently announced it would bring a new hardware product to market: wireless speakers.

The recent investment thesis for Roku was that the company was transitioning away from a lower-margin hardware-focused company to one that would make its money via monetizing streaming delivery.

Looking ahead…..

Although the company has grown total revenue 36% over the prior year, its gross profit is up 62% because all of progress it's made in the higher-margin platform division.

In the last few quarters, the company's player gross profit has decreased, a natural result of its strategy of selling more hardware at lower prices so as to profit later the higher-margin content segment. Last quarter was celebrated as the first where platform revenue exceeded player revenue.

Roku is reportedly ready to make its streaming service more cable-like, which isn't as bad as it sounds. Rather than having to download individual apps to see a particular channel like HBO Now or CBS All Access, viewers will be able to sign up for a video subscription service that will let them choose the channels they want and pay for it all in one place.

Analysts and Hedge Funds Opinions

Accelerating customer growth and strength could drive additional upside for Roku, according to KeyBanc Capital Markets. KeyBanc’s Evan Wingren maintained an Overweight rating on Roku and raised the firm’s price target on the stock from $44 to $54.

Customer acceleration is likely in the second quarter, as growth has continued to rise even further since mid-quarter and could drive confidence in Roku's ability to exceed consensus expectations, Wingren said in a Monday note.  

“We expect more active accounts to drive higher platform revenue and gross profits," the analyst said.

Search volume has increased 18 percent year-over-year, which could act as a good indicator of consumer interest in Roku, Wingren said.

Roku’s ad-supported video-on-demand channel is seeing momentum and likely gaining adoption, which could be attributed to recent content additions, in KeyBanc's view.

“Growth in The Roku Channel could accelerate ad inventory and drive gross profits above our expectations," Wingren said.

Several other equities analysts have recently commented on the company…..

  • Zacks Investment Research raised Roku from a “hold” rating to a “buy” rating and set a $55.00 price target on the stock in a research note on Friday.
  • KeyCorp upped their price target on Roku from $44.00 to $54.00 and gave the stock an “overweight” rating in a research note on Tuesday last week.
  • BidaskClub raised Roku from a “hold” rating to a “buy” rating in a research note on Saturday, July 7th.
  • Oppenheimer raised Roku from a “market perform” rating to an “outperform” rating and set a $50.00 target price on the stock in a research note on Tuesday, July 3rd.
  • Finally, UBS Group raised Roku from a “market perform” rating to an “outperform” rating in a research note on Tuesday, July 3rd.

Seven analysts have rated the stock with a hold rating, eight have issued a buy rating and one has assigned a strong buy rating to the company’s stock.


Having combined simplicity and price with its early first-mover status, Roku has created an offering that is hard to beat. It also indicates why the service is smart not to abandon its hardware business as it develops the platform side to become its primary source of revenue.

Roku Inc has a 12 month low of $15.75 and a 12 month high of $58.80. The firm has a market capitalization of $4.93 billion and a PE ratio of -22.22.