Roku Stock Target Increased at Citi Due to Improved Profitability Outlook

Analysts at Citi have increased their price target for Roku shares from $60 to $77, reflecting the bank’s heightened confidence in the company’s strategies to drive platform revenue growth. They have maintained a Neutral rating on the stock.

In a note released on Tuesday, Citi explained that the new price target is based on a multiple of free cash flow (FCF), marking a shift from their previous valuation method, which relied on an enterprise value to subscriber (EV-sub) multiple.

This decision comes after Roku’s solid performance in generating FCF, management’s focus on improving FCF, and expectations for greater future cash flow generation. With this updated valuation, Citi estimates that Roku is valued at approximately 34 times its projected 2025 FCF, plus about $16 in net cash per share, resulting in the new price target.

Since the company reported its second-quarter results for the year 2024, Roku’s shares have increased by around 45%.

Citi attributes this rise to increasing investor confidence in Roku’s efforts to enhance platform revenues. These efforts include a stronger emphasis on subscription revenues, improving ad fill rates by utilizing third-party Demand-Side Platforms (DSPs), and better monetization of the home screen.

Analysts believe that the consensus estimates for Roku are reasonable, indicating that the company is poised to capture a larger share of global digital video advertising spending than it has in prior years, excluding the impacts of the COVID-19 pandemic.

Street estimates suggest that Roku could generate an additional $205 million from its new initiatives, which Citi considers achievable.

Citi analysts noted, “We estimate Roku would need to achieve approximately 9 million subscription sign-ups or enhance ad fill rates by around 9% to generate approximately $205 million in incremental revenue.”

They further stated, “Meeting these targets appears reasonable to us. Consequently, we are projecting platform revenue in line with the broader market expectations.”