Roku Inc.’s profit picture is improving, leading to an upgrade from bearish analyst Michael Nathanson. In his latest note to clients, Nathanson writes that the company has made significant progress in improving its cost base, resulting in a difficulty to see any “meaningful downside” for the stock. Although Nathanson is more pessimistic than the crowd regarding revenue trends, he remains ahead of the consensus view with his expectations for adjusted earnings before interest, taxes, depreciation, and amortization through 2025.
Despite concerns about increasing competition in Roku’s two key revenue segments – devices and advertising – Nathanson believes that the company’s intense focus on achieving real profitability and free cash flow reduces the risk of further de-rating of the shares. He clarified that his upgrade is not based on a stronger top-line or healthier scatter market for Roku, but rather on raising profitability forecasts above consensus with the stock reaching a $55 price target.
Nathanson’s upgrade comes just before Roku’s third-quarter results are expected to be posted. While Roku’s management increased its revenue outlook in early September, Nathanson anticipates a slower acceleration of advertising revenues in the fourth quarter. He speculates if the recently disclosed job cuts at Roku could be an indication of potential weakness in top-line growth.
Year-to-date, Roku shares have increased by 40%, with a roughly 1% boost early in Tuesday’s session.
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