Insights

Why Roku Stock Rallied on Tuesday

What happened

Shares of Roku (NASDAQ: ROKU) surged on Tuesday, jumping as much as 8.4%. As of 11:35 a.m. ET, the stock was up 8.1%.

The catalyst for the move was news that a high-profile name on Wall Street has been loading up on shares.

So what

Roku reported its second-quarter earnings after the market close on Thursday and investors didn’t like what they saw. The stock got pummeled on Friday, falling 23%. Yet even in the face of that shellacking, star money manager Cathie Wood was undeterred.

The founder and CEO of Ark Investment Management has been buying Roku shares hand over fist even as the stock was selling off, adding them to her flagship exchange-traded funds (ETFs), according to a report by Barron’s

In fact, Wood added 373,857 Roku shares to the Ark Innovation ETF (NYSEMKT: ARKK). At the same time, Ark Next Generation Internet ETF (NYSEMKT: ARKW) and Ark Fintech Innovation ETF (NYSEMKT: ARKF) bought 57,876 and 37,570 shares, respectively. In all, Roku now represents 6.9%, 7.3%, and 1.1%, respectively, of the total invested funds of these ETFs. 

Now what

After reviewing Roku’s results, Wood came away optimistic about the company’s prospects. Roku makes the lion’s share of its revenue from the digital advertising that appears on the 10,000 streaming channels on its platform, and Wood believes that it has a vast opportunity ahead.

“In our view, the third-quarter guidance is conservative, as Roku reported more than $1 billion in ad commitments during the year’s upfront selling season, representing approximately 16% of upfront CTV ad spend and 5% of total upfront add spend,” Wood said. 

Wood is likely on to something. Connected-TV ad spending surged 57% to $15.2 billion in 2021 and is expected to climb another 39% in 2022, reaching $21.2 billion. Yet in spite of that growth, a large opportunity remains. Streaming represents 45% of television viewing, but has thus far attracted just 18% of the ad dollars. 

Roku is the industry-leading streaming aggregation platform, so it’s well positioned to benefit as advertising dollars shift from traditional TV to streaming. That makes Roku stock a buy.

Danny Vena has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.

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