Stephens Downgrades Roku On Valuation, Still Bullish On Long-Term Outlook

Roku Inc ROKU continues to boast a favorable long-term outlook as it addresses a "vital layer" of the streaming video ecosystem, however, a combination of valuation and near-term earnings concerns has Stephens moving to the sidelines.

The Analyst

Stephens analyst Kyle Evans downgraded Roku from Overweight to Equal-Weight with an unchanged $84 price target.

The Thesis

Roku's long-term favorable outlook is based on its ability to continue offering a compelling product to consumers and monetizing its strategic position with advertisers and content makers, Evans wrote in a note. The stock's surge from around the $30 level at the end of 2018 values the company at 10.2 times EV/2020 estimated platform revenue and 18.5 times 2020 estimated EV/gross profit. This compares to the analyst's $84 price target, which is based on 8.9 times 2020 estimated platform revenue and 16.2 times 2020 estimated total gross profit.

Aside from valuation, Evans said the majority of analysts who rate Roku with a neutral or bearish stance are expecting second-quarter results to come in ahead of consensus estimates. This scenario isn't necessarily uncommon, but it does create near-term risk for Roku given its reputation of historical volatility following earning misses. For example, shares fell more than 20 percent after third-quarter 2018 platform revenue missed expectations of $103.2 million by 3 percent.

Price Action

Shares of Roku were trading lower by 6 percent at $90.04 at time of publication.

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Photo courtesy of Roku.