Roku stock experienced a significant decline on Friday following a downgrade from analyst team MoffettNathanson. Concerns were raised that the shares of the streaming-media company had risen too quickly and too fast.
Led by Michael Nathanson, MoffettNathanson analysts downgraded Roku from Neutral to Sell on Friday. They also adjusted the earnings estimates for 2023 and 2024. Despite the downgrade, they increased their stock price target to $66 from $64.
During Friday’s trading, the stock declined by 6.5% to $96.24. However, it is important to note that Roku shares have risen by an impressive 136% this year.
This recent ratings adjustment is a reversal of the firm’s upgrade to Neutral at the end of October, which coincided with Roku’s better-than-expected third-quarter earnings report, showcasing positive revenue and active account figures.
In a Friday report, analysts explained their initial upgrade and subsequent downgrade: “We weren’t making a call on a stronger top-line; instead, after a ridiculous, undisciplined surge in expenses in 2021 and 2022, the company had taken meaningful cost actions to rein in expense growth, and we saw a path towards achieving profitability.”
It is necessary to highlight that the downgrade is not due to any change in the analysts’ view of the company’s fundamentals. Rather, it stems from concerns about the company’s valuation. Since Roku’s third-quarter results were announced on November 1, the shares have surged by 72%, according to Dow Jones Market Data.
MoffettNathanson stated in their report that even with their fairly optimistic forecast for adjusted earnings before interest, tax, depreciation, and amortization, they cannot justify the current stock levels in their valuation framework.
According to the firm’s research, Roku experienced significant revenue growth this year, primarily driven by content distribution sales. However, they anticipate that streaming subscription growth will continue to slow down, which will consequently impact content distribution revenue.
For Roku’s growth next year, the focus will be on Connected TV advertising, specifically ads that appear while streaming content. However, analysts believe that “better scaled players” such as Amazon Prime, Netflix, and Disney are likely to dominate the market share.
