Here’s Why Roku Stock Tumbled 15% Today

For those tuning in to Roku (ROKU) today, the stock is getting hammered. Following a downgrade from Morgan Stanley, the streaming player's shares have shed 15% of their value. As a result, some have been left wondering what prompted this show of bearish sentiment as Roku has soared 342% year-to-date thanks to increasing estimates and general excitement over all things streaming.

Five-star analyst Benjamin Swinburne tells investors that his downgrade wasn’t spurred by Roku’s growth prospects, which he remains bullish on, but rather the risks that he doesn’t believe are built into the current share price.

“We see the risk/reward skewed to the downside. Roku’s valuation levels have surged past digital media players and even past high-growth SaaS companies despite structurally lower gross margins,” Swinburne commented.

Swinburne adds that it will be increasingly difficult to sustain the current premium as gross margins drop and gross profit growth moderates. To this end, the top-rated analyst lowered the rating to Underweight and set a $110 price target, indicating 20% downside potential from current levels. (To watch Swinburne’s track record, click here)

So what does all this mean for Roku? Here’s the lowdown.

The Risks Are Underestimated

Swinburne argues that a correction with respect to share prices could be fueled by several key factors. First and foremost, faster-than-expected gross margin pressure could take a toll, which has already appeared as a trend evident in recent results and guidance.

On top of this, the Morgan Stanley analyst points out that the market has underestimated the mounting risks with regards to account growth. According to Swinburne, Roku’s user acquisition has benefited materially from its partnership with one OEM in particular, TCL. For the first time since Q1 2017, active account net additions slowed year-over-year, with this trend likely to continue if there aren’t any new major OEM partners.

Additionally, the competitive landscape is broader than some might think, going beyond streaming sticks to every smart TV, gaming consoles and connected set-tops from the likes of Comcast and AT&T’s Direct TV.

The analyst also cites the advertising segment as a must-watch area of the business. “We think the law of large numbers for its high-growth advertising business will lead to decelerating growth, likely faster-than-expected. This has been the case with other emerging advertising businesses like Snap and Twitter, where rather than fade modestly, growth slowed dramatically, leading to de-rating,” he explained.

The Rest of the Street’s Take

Looking at the consensus breakdown, the Street’s take is more of a mixed bag when it comes to Roku. With 9 Buy ratings, 2 Holds and 2 Sells assigned in the last three months, the consensus is that the stock is a Moderate Buy. At an average price target of $143.67, the upside potential lands at 5%. (See Roku stock analysis on TipRanks)    

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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