Roku Falls On Morgan Stanley Downgrade, Analyst Thinks Revenue Growth Will Slow In 2020

Roku Inc ROKU has traded up 400% this year on streaming hype. The market’s enthusiasm leaves one otherwise-bullish analyst cautious.

The Rating

Morgan Stanley analyst Benjamin Swinburne downgraded Roku to Underweight and raised his price target from $100 to $110.

The Thesis

Roku’s valuation has surpassed those of digital media peers and high-growth Software-as-a-Service companies.

“We have been comfortable with Roku’s premium valuation historically, as the business was accelerating and gross margins were outperforming,” Swinburne wrote in a report. “However, we think it will be increasingly difficult to sustain the current premium – with Roku's platform EV/sales multiple nearly triple NFLX and nearly double high-growth SAAS – as gross margins fall and gross profit growth moderates.”

By his assessment, international opportunities will take time to monetize, and competition and a dearth of new manufacturing partners will slow active account growth. Streaming sticks, smart TVs, gaming consoles and set-tops are expected to poach accounts.

“[W]e think the law of large numbers for its high-growth advertising business will lead to decelerating growth, likely faster than expected,” Swinburne wrote. “This has been the case with other emerging digital advertising businesses like Snap and Twitter Inc, where rather than fade modestly, growth slowed dramatically, leading to de-rating.”

Price Action

Roku shares traded down 8% to $147.25 at time of publication.

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Photo courtesy of Roku.