Morgan Stanley Turns Neutral On Roku After Stock's 25% Year-To-Date Decline

With the stock down more than 25 percent since the turn of the year, the bearish case for Roku Inc ROKU no longer applies, as the valuation no longer implies a "market overreaction," according to Morgan Stanley.

The Analyst

Morgan Stanley's Benjamin Swinburne upgraded Roku from Underweight to Equal-weight with a price target lifted from $32 to $38.

The Thesis

The bearish case for the streaming video company's stock was based on the thesis that Roku is demonstrating "solid execution" in terms of growing its user base and average revenue per user, but the stock simply got ahead of itself, Swinburne said in the upgrade note.

Roku's stock multiple peaked at north of 17x 2018E platform sales and 12x 2019E platform sales. But after seeing weakness throughout 2018, Roku's stock is trading at a "more balanced" valuation of 6.5x 2019E platform sales, the analyst said. 

Morgan Stanley isn't yet bullish on Roku's stock for three key reasons, Swinburne said:

• A lack of visibility into Roku's long-term ad monetization opportunity, as it is still mostly an "aggregator" of third-party content.
• The potential for increased competition from heavyweight tech giants.
• Monetizable ad-supported hours need to grow at a faster pace than subscription video hours.

Should Roku's management offer greater disclosures into its revenue composition and trajectory, the case for being aggressive on the stock could be made in the future and support upside in the shares, the analyst said. 

Price Action

Shares of Roku were trading higher by 2.2 percent early Tuesday morning.

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Photo courtesy of Roku.