Roku Is Just Getting Started

Roku (NASDAQ: ROKU) is one of this year's biggest winners. The streaming video specialist has seen its stock more than triple in 2019, hitting another new all-time high on Friday. It's only natural for hot stocks to cool down, but there are also some pretty encouraging signs that Roku's breakout is here to stay.

Roku is in the right place at the right time as the binge-viewing revolution takes off. Home theaters and folks who enjoy their video entertainment on the go are spending more and more time streaming at the expense of traditional cable and satellite television services. Roku is cashing in, and while its fundamentals aren't improving at the same pace as its stock -- this isn't really three times the company it was five months ago -- investors are finally coming around to embracing the spoils of war that seem to belong to the pioneer in this booming niche.

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Streaming along

The secret to Roku's rapid ascent is its growing hold on viewers. Platform revenue rose 79% in Roku's latest quarter, as a 40% surge in active users over the past year is being enhanced by a 27% increase in average revenue per user.

Roku now has more than 29 million active users on its platform through either its namesake streaming devices or the growing number of smart TVs that lean on Roku's operating system. These viewers consumed 8.9 billion hours of content during the first three months of 2019, a metric that breaks down to a whopping average of 3.5 hours a day per user.

With platform revenue growing faster than its original hardware sales, we've seen accelerating revenue gains in four of the past five quarters, another thing that growth investors love to see. We've seen at least five analysts jack up their price targets for the stock this month, including one Wall Street pro who has done so twice. Tom Forte at DA Davidson boosted his price goal on Roku from $80 to $92 three weeks ago, only to increase that target to $110 late last week.

A buffering bump in the road

The rally took a step back this week, as Stephens analyst Kyle Evans kicked off the holiday-shortened trading week by downgrading the shares on Tuesday morning. Evans is still upbeat on Roku's fundamentals, but with the stock blasting through his $84 price target when he was bullish, he doesn't feel compelled the boost his goal to justify his optimism. He's sticking to his $84 target and downgrading the stock from overweight to equal weight.

He may not be the last bullish analyst to cool off on valuation fears. Roku's more than tripling in less than five months has sent its market cap north of $10 billion, and this is when concerns about the addressable market start to kick in. One can also argue about the challenges of expanding the viewing habits of its established base. How much more than 3.5 hours a day can these 29.1 million active users spend in front of the TV or mobile device?

You still don't want to bet against Roku. It has done nothing but exceed expectations in its first two years as a public company, and one analyst getting cold feet isn't a seismic shift in momentum. Roku is still in the right place, and once the rubble settles it will be the right time again.

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Rick Munarriz owns shares of Roku. The Motley Fool recommends Roku. The Motley Fool has a disclosure policy.