Personal Finance

Roku Shares Plunge on Second Downgrade in 2 Days

The Roku Channel on a TV

It's been a rough couple of days for freshly public Roku (NASDAQ: ROKU) , maker of its namesake media streaming players. The company has received not one, but two analyst downgrades over the past two days, which has caused shares to plunge after a steep jump in the final months of 2017.

Roku's first public earnings release went rather well, with the company crushing its ongoing transition to the platform business, but the subsequent share-price surge may not have been warranted, and Roku's valuation looks incredibly stretched right now. Here's what investors need to know about the downgrades this week.

The Roku Channel on a TV

Image source: Roku.

A tale of two downgrades

Yesterday, Morgan Stanley analyst Ben Swinburne dropped his rating on Roku shares from equal weight to underweight, according to Tech Trader Daily , while increasing his price target from $25 to $30. Swinburne's biggest concern is the fact that Netflix and Alphabet subsidiary Google's YouTube represent a disproportionate amount of viewership, and Roku essentially does not monetize those channels.

Those companies likely leverage their sheer weight and popularity in order to get favorable terms in negotiating with Roku, and if consumers continue shifting toward those channels, the trend is incrementally negative for Roku's financials. It's rather telling that YouTube is the most viewed ad-supported channel on the platform but Roku receives exactly zero revenue from YouTube, underscoring how strong YouTube's hand really is when negotiating (one of the major risks that I highlighted when Roku first filed its S-1 in September).

"Further, we receive no revenue from YouTube, the most viewed ad-supported channel by hours streamed on our platform for fiscal 2016 and the nine months ended September 30, 2017," Roku wrote in its most recent 10-Q. "If we fail to maintain our relationships with the content publishers that account for a significant amount of the content streamed by our users or if these content publishers face problems in delivering their content across our platform, we may lose users and our business may be harmed."

This morning, Citi analyst Mark May followed up with his own downgrade from neutral to sell, while tweaking his price target from $27 to $28. May is worried that Roku's valuation looks overdone after the recent run-up, with Roku's enterprise value now trading at 8.7 times 2018 estimated revenue. As far as why shares have gained this much, May speculates that a small float and lack of pure-play over-the-top (OTT) alternatives have contributed. Furthermore, there are potential downside catalysts on the horizon, including a lock-up expiration in March, while larger tech giants continue to push deeper into the OTT space.

With shares trading around $47 even after plunging from these downgrades, there's still quite a bit of downside if either of the analysts' price targets prove accurate.

10 stocks we like better than Roku, Inc

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Roku, Inc wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 2, 2018

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of NFLX. The Motley Fool owns shares of and recommends GOOG, GOOGL, and NFLX. The Motley Fool has a disclosure policy .

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

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

In This Story


Other Topics


Latest Personal Finance Videos

How Student Loan Refinancing Works

Though it may be a great way to lower monthly payments, not everyone understands the student loan refinancing process. NerdWallet explains it. For more, try our refinance calculator:

Nov 25, 2019

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More