Shares of the popular streaming service Roku (ROKU) are up nearly 100% since the beginning of the year, but down about 13% from it’s 2019-high set in early March. This follows similar pattern from 2018, where its stock increased more than 130% between March and September, before ultimately crashing 60% at the end of the year. So if history were to repeat itself, perhaps investors should be prepared for a continued sell-off of Roku shares.
Indeed, Rosenblatt analyst Mark Zgutowicz believes the stock has additional downside ahead as he initiates coverage on ROKU with a Neutral rating and $63 price target. (To watch Zgutowicz’s track record, click here)
Zgutowicz acknowledges Roku’s popularity from both consumers and advertisers, but believes “the stock’s intrinsic value more than reflects its market position.” In order for “Roku to garner a higher valuation,” the analyst believes “it needs to solidify more premium content on the Roku Channel, necessary to scale unique and frequent viewership and subsequently gross profit.” But this isn’t happening, with advertising platform margins continuing “to compress as it competes for high-priced premium inventory, required to package non-premium Roku Channel inventory, that it then must resell at a bigger premium.”
The analyst isn’t saying that Roku’s current strategy isn’t working. In fact, he “fully agree[s] with a strategy to leverage owned ad inventory with unique viewership data within the walls of the Roku Channel.” But Zgutowicz does not “believe sticky viewers are drawn to non-premium content nor are advertisers looking for premium placement.” The analyst estimates about 10% of Roku’s 27 million households are “actively viewing the Roku Channel, a viewership that does not scale close to the premium inventory it’s bundled into ad buyers.” The analyst does not see Roku Channel gaining in popularity “without unique content.”
Furthermore, the analyst concedes that “there is no doubt Roku TV provides enormous, 27M household reach, which can drive nearly 40% of a content programmer’s OTT viewership.” But even with that, it all comes back to original content. Zgutowicz says, “without its own original content or deep pockets like Amazon and Apple to pull in more highly sought premium content inventory, it’s hard for us to see active account penetration beyond our estimates.”
All in all, TipRanks suggests caution roars loud on Wall Street for sell-side analysts sizing up the streaming device maker’s prospects. Out of 11 analysts polled in the last 3 months, 5 are bullish on ROKU stock, 5 remain sidelined, while only 1 is bearish the stock. With a loss potential of 9%, the stock’s consensus target price stands low at $63.40. (See ROKU’s price targets and analyst ratings on TipRanks)
Read more: Roku Stock: Needham’s Top Analyst Vs. Loop Capital and Macquarie