“We believe the market is underestimating the competition” Roku faces, analyst Ben Swinburne says
Roku’s stock was hammered on Monday, after Morgan Stanley put out a note to clients warning its share price is overvalued following a remarkable run this year.
The reasons for investors to be enthusiastic on Roku are already “priced in,” according to the note from Morgan Stanley analyst Ben Swinburne. Heading into Monday morning, Roku had been a Wall Street darling this year, with the company’s share price increasing from about $32 a share to more than $160 per share, thanks to strong customer growth and the continued expansion of its advertising business.
Swinburne wrote he is “bullish” on the company’s growth overall, but that it’s hard to find shareholder value after it’s big leap this year.
“Roku shares are up over 400% [year-to-date] due to rising estimates and overall exuberance over all things streaming. As a result, we see the risk/reward skewed to the downside,” Swinburne wrote.
The note helped send Roku’s share price plummeting on Monday, with the company falling 15 percent on the day to $136.07 per share.
A Roku representative said the company does not comment on analyst notes.
With several new streaming services hitting the market, including Disney+ and Apple TV+ — coupled with the continued exodus of cable and satellite customers — Swinburne said “market enthusiasm” has reached its “peak” for Roku.
He listed three “risks” that make him question whether or not Roku can sustain its run: the rate at which its active accounts are growing is decreasing compared to previous years; competition in the streaming device market is “wider than appreciated”; and that half of Roku’s streaming hours come from YouTube and Netflix — two services it doesn’t make money off of.
“We believe the market is underestimating the competition on platform active accounts in the U.S., as well as the time it takes for international expansion to scale,” Swinburne added.
Roku reported last month it gained nearly 2 million active accounts during Q3, pushing it to 32.3 million customers in total. Altogether, its viewers watched 10.3 billion hours of content during Q3 — or the equivalent of about 3.5 hours per account spent streaming each day. Roku increased revenue more than 50% year-over-year, with sales of $261 million narrowly surpassing analyst estimates of $257 million.
The company, which is best known for its array of streaming devices, has started to lean more heavily on its advertising business in recent quarters. Its ad business accounted for nearly $180 million of its Q3 revenue.
Despite the big drop on Monday, Roku’s stock price is still up more than 310% since early January.