Roku Shakes Off a Bear on Back of More ‘Balanced’ Valuation

Morgan Stanley's Benjamin Swinburne pays attention to ROKU shares, which present-day are no longer overpriced by his eyes, deeming the valuation far more justified.


Morgan Stanley analyst Benjamin Swinburne spotlights Roku (NASDAQ:ROKU) as a company “growing into its valuation,” prompting him to walk away from the bears today. The stock has dipped more than 25% year-to-date, which makes the video streaming platform’s valuation levels far “more balanced,” as far as Swinburne assesses the new picture. In fact, not only do ROKU shares now pose a more enticing value, but Swinburne likewise notes that core fundamentals “consistently” beat out his previous expectations, with strength in both average revenue per user as well as user growth helping to offset weakness in engagement.

On back of revenue growth, user gains, and less expensive valuation, the analyst upgrades from an Underweight to an Equal Weight rating on ROKU stock with a $38 price target, which essentially aligns with current trading levels. (To watch Swinburne’s track record, click here)

“Greater disclosure into revenue composition and magnitude of monetizable inventory would increase conviction in estimates, supporting further upside,” anticipates the analyst. Before, when Swinburne had a bearish stance on the stock, the case hinged upon the conviction that Roku’s standout exertion on active account growth as well as rising Platform average revenue per user spurred a “market overreaction.” Present-day speaks to a different story for Swinburne: “we view current valuation levels at ~6.5x ’19E platform sales as more balanced (below NFLX at ~8x, above Spotify at 3.5x).”

That said, the analyst is not ready to join the bulls on this tech stock just yet, as he explains: “We continue to see the consumer shift to Internet TV accelerating. We also remain bullish on Roku’s ability to grow active accounts and streaming hours. However, at current valuation levels, this optimism is offset by concerns over 1) lack of visibility into the long-term ad monetization opportunity given Roku’s position as primarily an aggregator of third party content and 2) potential impact from increased TV OS competition from Amazon and Google. We hope to gain additional clarity on 1) Roku’s platform revenue breakdown, 2) available for sale advertising inventory, and 3) additional details on mix of monetizable ad-supported (AVOD) vs. subscription (SVOD) hours.”

AVOD hours must leap at a more rapid-fire pace than SVOD hours, continues the analyst, who believes this is the needed factor for the company to meet its expectations. Meanwhile, AVOD should split from giants of the likes of YouTube- companies which Roku is not substantially monetizing “directly,” and the company would be wise to make a deal for better inventory prospects from its alliances. On a positive standpoint, the Roku Channel Swinburne sizes up as a strength that assists Roku in driving AVOD usage along with ad revenues. Yet, as smart TV adoption feeds account gains, the analyst likewise still sees a fierce competitive backdrop in the limelight, from Amazon to Google, putting Roku’s market share of U.S. TV households under pressure.

Glancing ahead, the analyst now sees potential for Roku’s platform revenues to jump 4% in 2019 to 5% by 2020. While OS licensing deals seemed to be the key upside drivers in the first quarter, Swinburne believes advertising continues to be the company’s growth driver down the line.

TipRanks points to cautious sentiment tilted toward the bullish circling ROKU stock. Out of 7 analysts polled in the last 3 months, 2 rate a Buy on ROKU while 5 maintain a Hold. The 12-month average price target stands at $40.17, marking nearly 6% in upside potential from where the stock is currently trading.

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