Roku stock target raised at Citi on better outlook for profitability

Analysts at Citi raised their price target on Roku (NASDAQ:ROKU ) shares from $60 to $77, a move that reflects the bank’s growing confidence in the company’s initiatives aimed at accelerating its platform revenue growth. Citi maintained a Neutral rating on the stock.

According to a note published Tuesday, the new price target is based on a multiple of free cash flow (FCF), a shift from the previous valuation methodology that employed an enterprise value to subscriber (EV-sub) multiple.

The decision is based on Roku's recent performance in generating FCF, management's focus on FCF, and expectations that the company will produce more significant FCF in the future. With this valuation update, Citi now values Roku at approximately 34x its projected 2025 FCF, plus around $16 of net cash per share, leading to the new price target.

Roku's shares have seen an approximate 45% increase since the company reported its second-quarter results for the year 2024.

Citi attributes this surge to growing investor confidence in Roku's strategies to boost platform revenues. These strategies include a greater focus on subscription revenues, enhancing ad fill rates through the use of third-party Demand-Side Platforms (DSPs), and improved monetization of the home screen.

Analysts believe that the consensus estimates for Roku are reasonable, suggesting that the company is expected to capture a larger portion of the incremental global digital video advertising spend than it has in the past, excluding the COVID period.

The Street's estimates hint at an incremental revenue of around $205 million from Roku's new initiatives, which Citi finds achievable.

“We estimate Roku would need to drive ~9 million subscription sign-ups or improve ad fill rates by ~9%, to drive ~$205 million in incremental revenue,” analysts at Citi said.

“Hitting these targets seems reasonable to us. As such, we are forecasting platform revenue relatively in-line with the Street,” they added.

Source: Investing.com