Shares of Roku (ROKU) are sliding after Loop Capital analyst Alan Gould downgraded the stock to Sell, citing "excessive valuation" as the company faces "substantial potential competition." Also seeing competition rising, his peer at Macquarie cut his rating for Roku to Neutral on "full valuation" after the stock's 162% rise since Christmas lows.
SELL ROKU: While Loop Capital's Gould acknowledged that "stocks can go from expensive to more expensive," the analyst told investors that he can no longer justify a Hold rating on Roku and downgraded the stock to Sell, with an unchanged price target of $45. Further, Gould noted that the "excessive" valuation is corroborated by increased insider selling and the company filling to sell stock. While he believes the stock is "quite volatile," Gould does not see any meaningful catalyst ahead. The market is looking for growth and Roku exhibits some of the highest unit and revenue growth of any of the high growth internet/media stocks as it is capitalizing on the evolution of TV to streaming, but the company also faces substantial potential competition, he contended. The analyst believes Fire TV appears to be gaining share at Amazon (AMZN), with the Top 40 "Best Selling" TVs on the latter’s website showing 13 models powered by Roku versus 14 in August of 2018 and 10 by Fire, up from four last summer. Additionally, Gould pointed out that all of Roku's players and most TVs with Roku's O/S are produced in China, and if tariffs remove the pricing advantage, it could slow down the growth rate, at least temporarily.
MOVING TO THE SIDELINES: Meanwhile, Macquarie analyst Tim Nollen also downgraded Roku to Neutral from Outperform, while raising his price target on the stock to $66 from $57. After a 162% rise since Christmas lows, the analyst sees a "full valuation" given likely increasing competition in the ad-supported video on demand, or AVOD, space and limited further penetration in TV operating systems. AVOD will get more competitive, with services such as Viacom's (VIAB) Pluto TV, Amazon's ad-supported channel, and a potential Apple (AAPL) video service to be announced March 25, he contended. Also, the analyst argued that the addition of scaled subscription video on demand services, or SVODs, from Disney (DIS), Warner (T) and NBCUniversal (CMCSA) could limit the amount of library content made available to Roku Channel over time. While Roku has continued to "defy competitive threats" on the Player side for some time, Nollen thinks growth may slow as Roku is already well penetrated among smaller manufacturers and may face less ability to penetrate larger TV makers.
SUNTRUST REITERATES HOLD ON VALUATION: While reiterating a Hold rating for Roku on valuation, SunTrust analyst Matthew Thornton raised his price target on the stock to $63 from $42 and increased his FY19 revenue view to $1.02B from $984M. The analyst told investors in a research note of his own that he believes Roku's first quarter revenue guidance is likely "conservative" after reviewing its latest 10-K filing, as the outlook implies Platform segment revenue to be down 20% from the fourth quarter even though FY18 Platform sales were up 85%.
PRICE ACTION: In morning trading, shares of Roku have dropped almost 5% to $67.34.
Roku
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Amazon.com
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VIAB
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Comcast
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Apple
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Disney
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