What Happened?
Shares of streaming TV platform Roku (NASDAQ: ROKU) jumped 6.7% in the afternoon session after Baird analysts upgraded the stock's rating from Neutral to Outperform (Buy) and raised the price target from $70 to $90. The new price target implies a potential 24% upside from where shares traded before the upgrade was announced. While Baird noted that it had historically hesitated to comment on Roku's execution in the streaming business, the analysts believe that "shares are overlooking the meaningful changes in the business and the attractive long-term opportunity."
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What The Market Is Telling Us
Roku’s shares are very volatile and have had 20 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 26 days ago when the stock dropped 5% after the major indices declined (Nasdaq down 2%, S&P down 1.5%) as yields soared amid growing uncertainty about the future pace of rate cuts. Adding to the market's concern is the November 2024 presidential election, with investors still trying to figure out the potential policy direction under the next administration.
Additionally, the earnings season is contributing to heightened volatility, with investors still processing weak quarterly updates from Starbucks and Boeing.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
Roku is down 16.5% since the beginning of the year, and at $74.21 per share, it is trading 30.6% below its 52-week high of $106.87 from November 2023. Investors who bought $1,000 worth of Roku’s shares 5 years ago would now be looking at an investment worth $462.51.
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