Roku's Slowing Profit Growth Keeps Analysts, Investors Hesitant On The Stock

Investors continued to disconnect from Roku Inc ROKU following tepid forward guidance that also failed to impress sell-side analysts, who warned of slowing growth in profits. The sell-off came despite third-quarter revenue and earnings beats on Wednesday.

The Analysts

Wedbush analyst Michael Pachter kept a Neutral rating and $105 price target on Roku.

Morgan Stanley's Benjamin Swinburne kept an Equal-Weight rating and $100 target price.

DA Davidson's Tom Forte reiterated a Buy rating and $185 price target on the stock.

The Theses

Swinburne remains tepid on "a clear trend of slowing Platform gross profit growth." He said Roku's results and fourth-quarter guidance reflect the rapid growth in the overall streaming market, in which Roku has a strong position.

But he and others noted that a high valued stock like Roku requires ongoing upside - and the fourth quarter guide was instead lower than expected.

"Net, we think ROKU’s multiple required ongoing acceleration which they did not deliver," wrote Dan Forman, sector strategist with Olivetree.

Disney, Apple Effect

Coming new streaming services from Walt Disney Co DIS and Apple Inc. AAPL should help Roku, several analysts noted. But how much is the question.

"We wonder if these launches might underwhelm," wrote Forman.

Pachter expects Roku to reach profitability within the next five years, but warned R&D spending may be high for several years as it competes for TV licensing contracts and funds its international expansion.

"Roku has substantial growth opportunities, but we think the multiple is already stretched," Pachter wrote in a note.

Buy The Dip

But after Roku's 15% drop in after-hours trading, investors should buy on the weakness, Forte argued, a bullish contrarian with a much higher price target on the stock than his peers.

Forte noted the strong quarter-over-quarter active account growth in the just-reported quarter, along with better-than-expected revenue and profitability. Forte said the market over-reacted with the sell-off, positing the stock was hit in part by overall angst about mid-cap internet stocks.

Price Action

Roku's stock was down 11.7% Thursday afternoon, trading at $124.55 per share.

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Photo courtesy of Roku.