Shares of Roku (ROKU) were under pressure yesterday and early morning today after Roku TV brand licensee TCL announced an official restructuring plan and Needham analyst Laura Martin slashed her price target on the stock to a low on Wall Street. Martin sees rising political tensions with China negatively impacting Chinese-made TV sales in the U.S.
TLC RESTRUCTURING PLAN: Following the likes of Tencent (TCEHY) and Alibaba (BABA), TCL plans to restructure its business, pivoting away from consumer electronics and focusing on enterprises, TechNode reported yesterday. The company released an official restructuring plan over the weekend, saying it plans to sell its stake in nine businesses, which are mostly consumer appliance businesses, to TCL Industries Holdings, the publication added. The company will sell 100% of its shares in five of the companies and sell stakes that range from 36%-75% in the other four, TechNode stated. The company also told the publication that it would focus on semiconductors and displays as its core business. In its last annual 10-K filing, Roku stated that, "Roku TVs are manufactured and sold by our TV brand licensees, integrate our Roku Operating System, or Roku OS, and leverage our smart TV hardware reference design. Current licensee brands consist of Element, Hisense, Hitachi, Insignia, RCA, Philips, Sharp and TCL, with a ninth brand, Magnavox, joining in spring 2018...in 2017 we participated in the introduction of dozens of new models of Roku TVs with TCL that incorporate new technologies and larger screen sizes and we updated our entire streaming player product line for higher performance and new features. Whether users will broadly adopt new devices is not certain."
NEEDHAM SLASHES ROKU TARGET: In a research note to investors, Needham’s Martin lowered her price target for Roku to $45 from $85 and reduced her user additions, revenue and earnings estimates for fiscal year 2019 based on “rising political tensions with China” that may negatively impact Chinese-made TV sales in the U.S. The analyst believes 35%-45% of Roku's total user adds came from Roku-powered, Chinese-made TVs in FY18, and that TCL was about half of that. Lower revenue is tied to lower user additions, and the absence of one-time 606 accounting, content distribution and licensing revenue in the first half of 2019, she said. Further, the analyst pointed out that lower EBITDA margin assumptions are tied to Roku’s guidance for breakeven EBITDA in fiscal year 2019 through headcount/cost growth, rather than the positive EBITDA Roku demonstrated in fiscal year 2018. Nonetheless, Martin reiterated a Buy rating on Roku’s shares, citing key drivers of growth in 2019 that include the scale potential of its active 32M user base, lengthening engagement from the current three hour per day per household viewing, and the increasing number of its users without a linear TV bundle being reached by advertisers. According to Bloomberg data, the average price target for Roku shares among 12 analysts with targets update in the last three months is $64.33.
PRICE ACTION: In afternoon trading, shares of Roku have bounced back and have gained about 1% to $36.02. Yesterday, the shares had slid about $2, or roughly 6%.
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