Roku facing 3 big risks despite surging stock

Roku’s growth potential has peaked

Roku’s surging stock, which has gained 423 percent this year, has gotten ahead of its fundamentals, according to one Wall Street analyst, sending shares lower Monday.

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TickerSecurityLastChangeChange %
ROKUROKU INC144.26-4.08-2.75%

Morgan Stanley analyst Benjamin Swinburne on Monday downgraded shares to “underweight” but raised his price target to $110 -- 32 percent below where they finished Friday -- citing “exuberance for all things streaming.”

“We believe there are risks to growth expectations not reflected in current valuation levels,” wrote Swinburne. “Specifically we think revenue and gross profit growth slow meaningfully in ’20 and the multiple compresses.”

Swinburne says Roku’s current premium will be difficult to sustain due to faster-than-expected gross margin pressure, slower active account growth and the road to international monetization taking longer than expected.

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He notes there are three key risks that the market is underestimating.

  1. Active account net additions in the third quarter posted their first year-over-year decline since the first quarter of 2017, and that is likely to continue without new original-equipment-manufacturer partners.
  2. The competition to Roku is larger than people think, due to smart TVs, gaming consoles and other streaming devices.
  3. The company’s high-growth advertising business is likely to slow down – just like what was seen at Snap and Twitter.

Swinburne says valuation will eventually matter, even for growth stocks, and that “Roku’s growth potential is at a peak.”

Last month, Roku reported total operating expenses surged 60 percent in the third quarter amid efforts to expand its services and reach. The streaming service lost $11.7 million, or 22 cents a share, during the quarter as revenue surged 50 percent to $260.9 million.

Roku raised its full-year 2019 revenue and gross profit outlooks.

Following the report, Wedbush analyst Michael Pachter said he expects the company to “reach profitability within the next five years, but R&D spending may remain elevated for several years as Roku competes for TV licensing contracts and funds its international expansion."

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Pachter has a “neutral” rating and a $105 price target.