COVID-19 vaccines have arrived, much to the relief of mankind. That said, rising coronavirus cases continue to be a matter of concern. But what does all this mean for the “stay-at-home” stocks like Roku, Zoom, Shopify, Teladoc and Netflix, which delivered impressive returns last year?
These companies experienced an expansion in their customer base when lockdowns restricted movement, though some like Netflix did see the growth moderate as restrictions eased and the economy reopened.
Investors are keen to know if the companies that gained from stay-at-home mandates last year are poised to grow further once the pandemic-induced tailwinds fade. Using TipRanks’ Stock Comparison tool, we will stack up Roku against Zoom to find out what the Street thinks about the prospects of these two tech stocks.
Leading TV streaming platform Roku is gaining from the cord-cutting phenomenon (shift from cable or satellite services to streaming alternatives). As per the company, about one-third of US households have cut traditional pay TV.
Roku’s platform business, which includes advertising and subscription revenue, accounted for 71% of the overall top-line in the first nine months of 2020, while the remainder came from the sale of streaming players and other devices. To further strengthen its platform revenue, the company has acquired Quibi’s global content distribution rights. Roku intends to stream over 75 shows and documentaries produced by Quibi to its Roku Channel users for free, through an ad-supported model.
Last week, Roku announced that it ended 2020 with 51.2 million active accounts (preliminary data), reflecting the addition of 5.2 million accounts (quarter-over-quarter) in 4Q and about 14 million in 2020. Furthermore, viewers streamed about 17 billion hours in 4Q and 58.7 billion in 2020, implying 55% year-over-year growth in these two periods.
Both key metrics reported by Roku exceeded expectations and reflected further improvement compared to 3Q, which saw 2.9 million new active accounts and streaming hours growth of 54%. Overall, the company’s 3Q revenue surged 73% to $452 million and resulted in a surprise profit of $0.09, while analysts were expecting a loss. (See ROKU stock analysis).
Roku’s 4Q preliminary data made it clear for Needham analyst Laura Martin that the company has “won the streaming wars in the US.” Martin believes that Roku will continue to grab more market share this year due to its connected TV focus, platform competitive advantages and impressive execution.
The 5-star analyst believes that Roku’s advertising revenue this year will benefit from a larger installed base as the economy and ad spending recover. Martin also expects revenue to gain from the accelerated adoption of Roku’s streaming devices.
In line with her optimism on Roku, Martin boosted the price target for the stock from $315 to $400 and reiterated a Buy rating.
Following the 4Q update, Rosenblatt Securities analyst Mark Zgutowicz raised the price target on Roku considerably from $260 to a Street-high of $420, based on improved ARPU (average revenue per user) dynamics and international monetization potential.
Discussing the company’s ARPU, Zgutowicz noted, “Considering Roku video ads have considerably longer view rates than average digital, its relative pricing carries a considerable premium.”
Overall, Roku scores the Street’s cautiously optimistic Moderate Buy analyst consensus based on 12 Buys, 6 Holds and 1 Sell. However, given the meteoric rise of about 211% over the past year, the average price target of $301.79 indicates a downside potential of 24.4% from current levels.
Zoom became the go-to video conferencing platform amid the pandemic as companies adopted remote working, educational institutions embraced virtual learning and people tried to say connected.
The company delivered epic growth rates in the first three quarters of fiscal 2021 (ended Oct. 31). In fiscal 3Q, Zoom’s revenue spiked 367% to $777 million and adjusted EPS rose significantly to $0.99, from $0.09 in the prior-year quarter.
Zoom’s key metrics clearly reflect its growing reach. As of the end of fiscal 3Q, the company had 433,700 customers with over 10 employees, marking a 485% year-over-year rise. What’s more, customers contributing over $100,000 in trailing 12 months revenue grew 136% to 1,289.
Zoom expects to end fiscal 2021 with a growth rate of 314%, though the company indicated that its gross margin could continue to be under pressure due to a higher percentage of free users. (See ZM stock analysis on TipRanks)
Meanwhile, the company is expanding its offerings and sees strong opportunities for Zoom Phone and online events platform OnZoom.
Last month, The Information reported that Zoom has begun developing a web email service and might launch a very early version of the product to some customers in 2021, citing two people familiar with the matter. The report also mentioned that the company is looking into developing a calendar application.
D.A. Davidson analyst Rishi Jaluria feels that The Information’s report about Zoom’s push into email “makes a lot of sense.” In a note to investors, Jaluria stated, “We see a convergence of workplace communication tools and it would make sense for Zoom to add functionality for email and real-time messaging as part of the existing platform.”
The analyst argues that Zoom is “proactively investing in new growth opportunities instead of being complacent with the record growth it is seeing now.” Jaluria also pointed out that Zoom has $1.9 billion in net cash, which it could use to acquire companies to enter or expand into new areas.
Saying that Zoom remains one of his favorite names heading into 2021, Jaluria reiterated a Buy rating with a $600 price target.
The rest of the Street looks divided on the stock, with 11 Buys, 12 Holds and 1 Sell adding up to a Moderate Buy analyst consensus. Overall, shares have exploded 378% over the past one year and the average price target of $485.68 indicates further upside potential of about 39% in the 12 months ahead.
While Roku’s moat in the streaming TV platform space and rapid growth look promising, the Street feels that the stock has run its course. Even the Street-high price target for Roku indicates a modest upside potential of 5.2%. Zoom Video’s growth prospects also look appealing to many analysts, though there are concerns about the impact of “return to work” developments when the pandemic abates. Currently, Zoom stock appears to be a better pick based on its attractive upside potential.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.