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The Ratings Game: Why Roku’s stock deserves a fresh look, according to Citi

Roku Inc. shares got punished last week after the company delivered a disappointing set of earnings and forecasts, but Citi Research analyst Jason Bazinet doesn’t think the company’s business is broken.

He reiterated his bullish view of the company in a late-Tuesday note to clients, writing that Roku’s
ROKU,
+5.56%

recent woes seem to be the result of macroeconomic issues rather than execution stumbles.

See more: Roku gives weak outlook, misses on top and bottom lines

Bazinet wrote that there tends to be a “strong correlation” between Roku’s growth in platform revenue and Alphabet Inc.’s
GOOG,
+2.88%

GOOGL,
+2.93%

growth in revenue for its YouTube division. In the latest quarter, Roku’s platform business ended up showing slightly better growth than his regression analysis would have predicted, suggesting “that Roku’s recent weakness is a reflection of current market conditions.”

Further, he noted that digital-advertising growth is “pacing to finish 2Q22 below the pre-COVID average,” another factor he sees as indicative of broader advertiser caution instead of “firm-specific executional issues.”

“We believe the macro will eventually improve and Roku should benefit from the secular shift of ad dollars from linear to connected TV,” he added.

And in the meantime, Bazinet sees several positives for Roku, including that the company has $15/share in net cash on its balance sheet and “could see strategic interest from peers given the prevailing valuation.”

Roku shares are on track to post their third-straight day of gains, as they’re currently up 5% in Wednesday afternoon trading. The stock is up more than 21% from its close Friday, which brought a record daily plunge in the wake of the latest earnings report, though it’s still off about 7% from its pre-earnings close Thursday.

Bazinet rates the stock a buy with a $125 price target, down from $165 previously. The stock recently changed hands above $79.

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