Roku will benefit from Netflix’s ad-driven tier, according to Needham; Here’s what you need to know

There is a rumor going around that establishes this Netflix (NFLX) might consider bringing Roku (ROKU) under his wings. Remember, the two share a lot of history, with Roku actually starting out as part of Netflix before CEO Anthony Wood spun off the project in 2008.

Netflix’s apparent renewed interest comes at a time when it’s considering finally adding an ad-driven layer to its service, a move it’s historically rejected. However, the lack of new undergrowth has now prevailed.

It’s just a rumor so far, but even if Netflix doesn’t ultimately make an outage for its streaming giant, Needham analyst Laura Martin believes Roku will still benefit from adding advertising to the Netflix service. Why?

For one, ad revenue depends on “maximum reach,” and with Roku installed on 61 million devices worldwide, it’s a “must have” for Netflix. As such, it won’t appear on Roku devices unless it signs an Ad Revenue Share deal with Roku.

The next reason revolves around “consciousness”. To get consumers aware of its new ad-driven, cheaper tier, it’s going to have to come down to Roku’s “big homepage ad unit” (as well as Vizios, Samsungs, and others). Because every Roku viewer is essentially a streaming consumer, their audience has “no waste on streaming companies.”

Next, just like Disney — which is also adding an ad-driven layer and using Roku’s homepage to spread awareness of new content — Martin expects Netflix’s content marketing to use the same tactics. “As streaming matures and the battle for new customers intensifies, NFLX needs to buy more Roku ad units to let the largest base of streaming customers know what new content is coming to NFLX and why they should watch it,” explained Martin.

So, down to business, what does all this mean for investors? Martin reiterated a Buy rating on ROKU stock, while its $205 price target leaves room for 12-month gains of a whopping 113%. (To see Martin’s track record, click here)

Martin is Wall Street’s most prominent ROKU bull right now, but it’s by no means the only one — analysts’ average target of $152.26 implies shares will climb 76% in the coming year. Overall, the stock’s Moderate Buy consensus rating is based on 17 buys, 5 holds and 1 sell. (See Roku Stock Prediction on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is for informational purposes only. It is very important that you do your own analysis before making any investment.

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