Roku faces ‘yellow flags’ as it navigates growing AVOD market: analyst

Despite the potential challenges for Roku, MoffettNathanson predicts the company’s advertising revenues will increase significantly. (Roku)

Roku is currently in a good position to capitalize on the growing AVOD market in the U.S. but challenges from much bigger media and tech companies could be “yellow flags.”

Media analyst firm MoffettNathanson this week initiated coverage of Roku with a neutral rating and a $145 target price. The firm said Roku should benefit from AVOD industry growth – which it predicts will increase at a 34% compound annual growth rate over the next five years and total nearly $14 billion by 2024.

“Roku has built a strong gatekeeper position among streaming media devices (we estimate it is in around 40% of U.S. homes), which is creating a near-term opportunity to extract significant value from OTT companies seeking their shelf space to grow,” wrote Michael Nathanson in a research note.

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However, Roku is facing stiff competition from Hulu, Pluto TV, Tubi and Peacock, all of which are owned or controlled by major U.S. broadcasters. While Roku controls a large share of the connected TV device market in the U.S., it could face increased challenges from tech giants like Google, which appears to be getting set up for another run at the connected TV market. The report also seemingly suggests that Roku could receive significant pushback from major media conglomerates like Comcast and AT&T as the stalemates over HBO Max and Peacock continue.

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“While Roku’s current negotiating position is that streaming services need to be on their platform to be relevant, Roku is a small company in a marketplace packed with the world’s largest tech and media players who may not be willing to grant them the oxygen they need to flourish over time,” Nathanson wrote.

Despite the potential challenges for Roku, MoffettNathanson predicts the company’s advertising revenues will increase significantly. The firm estimates Roku’s U.S. video ad revenues will grow at a 38% CAGR over the next five years and total $1.9 billion by 2024. Roku’s U.S. video ad revenues have been growing by more than 100% for years now but that could slow down as user gains and engagement along with ad pricing growth moderates due to higher market position and increased competition.

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