Shares of Roku (ROKU) plunged in morning trading after shares were downgraded to Underweight at Morgan Stanley, which sees both revenue and gross profit growth slowing meaningfully in 2020.
REVENUE, GROSS PROFIT GROWTH COULD SLOW 'MEANINGFULLY': Morgan Stanley analyst Benjamin Swinburne downgraded Roku to Underweight from Equal Weight with a price target of $110, up from $100. Roku continues to execute a "sound strategy" to capitalize on the shift to streaming, but there are risks to growth expectations not reflected in current valuation levels, Swinburne told investors in a research note. Specifically, he said he thinks the company's revenue and gross profit growth could slow "meaningfully" in 2020, leading to multiple compression.
While Swinburne is bullish on Roku's growth prospects, he noted that Roku shares shares are up over 400% year-to-date due to rising estimates and "overall exuberance over all things streaming." As a result, the analyst said that the stock's risk/reward is skewed to the downside. He also pointed out that Roku's valuation levels have surged past digital media players and even past high-growth software-as-a-service companies "despite structurally lower gross margins."
OTHER CONCERNS: Beyond the stock's valuation, Swinburne is also concerned that Roku's advertising business might start decelerating more quickly than investors anticipate. "This has been the case with other emerging digital advertising businesses like Snap (SNAP) and Twitter (TWTR), where rather than fade modestly, growth slowed dramatically," he wrote.
Swinburne also pointed out a slowdown in active-account growth in the latest quarter on a year-over-year basis. In Swinburne’s view, Roku benefited in earlier quarters from its partnership with television maker TCL, which helped the company grow its active-account base since the Roku operating system became embedded in TCL sets. Without major new partnerships, Swinburne said platform revenue opportunities for Roku could be driven lower.
COMPETITION: Swinburne also said investors may not be fully appreciating the number of competitors Roku has, citing new "box" offerings from telecommunications players like AT&T's (T) DirecTV and Comcast (CMCSA). At the same time, he said Roku users have made apps like Comcast’s Xfinity TV and Charter's (CHTR) Spectrum among the top apps viewed on Roku’s platform, but he sees live streaming through multichannel video programming distributors or virtual MVPD as more "challenging" for Roku to monetize as successfully.
PRICE ACTION: In morning trading, shares of Roku are down 16% to $135.44.