Roku (ROKU 0.31%) shares are down 35% year to date and still trading well off the highs from a few years ago. However, the business has turned in profitable growth for three consecutive quarters.
The latest earnings results were good enough for Seaport Research to upgrade the stock from a neutral rating to buy, with a $74 price target, representing 23% upside from the current $60 share price.
Roku's prospects are improving
The macroeconomic headwinds that caused advertising spending to dry up in 2022 are behind Roku now. Revenue growth has steadily improved over the last year and came in at a solid 19% year over year in 2024's first quarter.
Seaport Research analysts believe Roku is well positioned to keep growing, as the digital ad market is expected to grow in the low-double-digit range this year.
While some investors are concerned about increasing competition in streaming, Roku has posted steady growth in the number of streaming households on its platform, up 14% year over year in Q1 to 81.6 million. This success can be attributed to Roku's ad-supported service, which offers a lot of free content.
The stock offers attractive value
The value of the stock is reflected in the company's improving free cash flow. The shares now trade at a price-to-free-cash-flow ratio of 20, which is attractive for a business that is growing revenue at double-digit rates right now. This valuation seems to account for the competition risk and could set up favorable returns.
Looking to 2025, management expects to accelerate the growth of platform revenue and continue growing free cash flow, which could send the stock to the analyst's price target and perhaps even higher over the next few years.
