Roku Analyst Sees Potential Risks To Long-term Earnings Power Reflected In Valuation

Fundamental issues and valuation have forced Morgan Stanley to remain bearish on video streaming equipment maker Roku Inc ROKU.

The Roku Analyst: Benjamin Swinburne maintained an Underperform rating on Roku and a $110 price target, suggesting roughly 30% downside from current levels.

The Roku Thesis Roku's valuation embeds earnings level that will be difficult to achieve unless the company achieves a substantially greater level of scale and market share, Swinburne said.

"At a $20bn EV and ~25x our '21E gross profits, we believe the market is already pricing in global success and largely ignoring rising risks," the analyst wrote in the note.

Investors are concerned about the company's ability to monetize the shift of consumers and advertisers to streaming, Swinburne said. This ability depends on Roku's ability to drive scale.

This is because the larger its user base and market share of connected TV consumption, the greater leverage it has over publishers in extracting an economic rent, the analyst explained. Similarly, the greater share of streaming advertising inventory it can sell, the more effectively it can monetize.

Rising tension with content publishers such as AT&T Inc. T-owned HBO Max and Comcast Corporation CMCSA-owned Peacock, and a shifting landscape with smart TV OEMs highlight potential risks to the long-term earnings power reflected in the company's valuation, according to Morgan Stanley. The accelerating fall of the bundle and rise of streaming will likely amplify these tensions.

ROKU Price Action: Roku shares were slipping 1.9% to $152.90 at the time of publication.

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