Roku: Potential Acquisition Target With 33% Upside

Roku's stock has been on fire lately, doubling since November 8 on strong user growth and a new television manufacturer deal.

I model Roku's future potential market as 200 million devices in 2022, with Roku grabbing a 60% share and earning 35% operating margins.

Roku is an extremely promising acquisition target, especially for Microsoft, which may wish to enter the smart TV operating system market due to synergies with existing markets.

Based on a discounted cash flow, I value Roku at $54 per share, representing approximately 33% upside potential.

This idea was discussed in more depth with members of my private investing community, The Growth Operation.

Investment Thesis
ChartROKU data by YCharts

Roku (NASDAQ:ROKU) has seen a large surge in pricing since November 8, driven by strong quarterly results and a new agreement with Philips to put the Roku OS onto Philips (NYSE:PHG) televisions. These results have caused some contributors to turn bearish on Roku, although shares still trade below others' projected ranges.

I model that Roku's value is $54/share, based on a DCF valuation. This is based on Roku gaining a 30% market share of a 200 million streaming device, including smart TVs and over-the-top (OTT) streaming devices, market in 2022. This is further based on an estimate that over the next 10 years, Roku will be able to increase its operating margins to 35%, between Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), the two largest digital advertising companies.

I also believe that Roku would be a strong acquisition for any of its competitors. Microsoft (NASDAQ:MSFT) may be especially well-served by purchasing the $4 billion company, given Microsoft's previous late entry into mobile OSes and subsequent failure in that market.

How Roku Makes Its Money
My first exposure to Roku was through owning one of its OTT streaming devices, which I use regularly and enjoy. These Roku devices compete with Google's Chromecast, Apple's (OTC:APPL) AppleTV, and Amazon's (NASDAQ:AMZN) Fire TV. They are used predominantly to watch Internet-based TV streaming services, such as Netflix (NASDAQ:NFLX), Hulu, Amazon Video, and the various sports streaming services, including MLB.tv and WWE Network (WWE). But these devices are not how Roku makes its money. Instead, these devices are sold at close to break-even pricing to grow the Roku OS platform.

 source :  https://seekingalpha.com/article/4125885-roku-potential-acquisition-target-33-percent-upside
https://www.servicedonline.com/

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