Shares of Roku (ROKU) are on the rise after Needham analyst Laura Martin raised her price target on the shares to $120 as she sees four key competitive advantages, including advertising, revenue optionality upside, active users that makes it a gatekeeper for new streaming services, and M&A potential.

COMPETITIVE ADVANTAGES: In a research note to investors, Needham analyst Laura Martin raised her price target for Roku to $120 from $85, while reiterating a Buy rating on the shares after hosting a "Streaming Panel" event last week. The analyst noted that the participants, which included Pluto TV, FuboTV, and Tubi TV, highlighted "unique advantages" offered by Roku being an Over-The-Top "aggregation platform" rather than a single streaming service. Martin highlighted Roku’s “unduplicated and unduplicatable” premium digital-TV advertising scale in the U.S., and revenue optionality upside from new Subscription Video On Demand entrants. Furthermore, the analyst noted that its 27M active users in the U.S. make Roku big enough to be a gatekeeper for 100% of new streaming services, suggesting pricing power. Nonetheless, Martin argued that the company is still "small enough" at a $120B market cap to be acquired.

Whereas Apple's (AAPL) iOS, Google’s (GOOGL) Android and Amazon (AMZN) generally have a take-rate of 30%- 50% of the total revenue earned on their platforms, ad-driven Over-The-Top services give Roku 20%-30% of their ad units as a fee to be included on Roku's platform, Martin contended, adding that this suggests minimal downward pressure on Roku's "take-rate." Martin also believes Roku is "the easiest to work with" of all the digital TV-related platform companies.

Commenting on the Amazon Fire TV potential risk, the analyst noted that she estimates that about half of the 34M Fire TV active users globally are in the U.S., implying about 14M U.S. users and much lower engagement hours per device than Roku's average. Additionally, Fire TV sticks have a "more vulnerable competitive position" because no major TV maker has shown any inclination to build Amazon into their TV sets, she added, noting that 1 of 3 connected TVs sold in the U.S. during the first quarter had Roku's operating system built into them for the lifetime of the TV set.

Additionally, Martin told investors that she believes multiple expansion can be driven by Roku selling subscriptions to Disney+ (DIS), Apple and WarnerBros (T) Over-The-Top Subscription Video On Demand services, for which Roku generates a visible and recurring revenue stream so long as that subscriber pays. Overall, the analyst said Roku remains her top pick for 2019.

PRICE ACTION: In late morning trading, shares of Roku have gained about 5% to $93.32.