Don’t Buy Roku Stock, Says Analyst; The ‘Coming Recession’ Is a Risk

At present, it seems everything is moving at an accelerated speed. Whether concerning the daily escalation of coronavirus cases, the programs being put into place to combat the economic effect, or the global race to find a vaccine/treatment to halt the pandemic.

If you’re a watcher of the comings and goings on Wall Street, then you can add the speed at which companies are currently reevaluated to the list, too. Which brings us to Roku (ROKU).

The present situation has caused a rethink at investment firm Wedbush on its model for the streaming player. The updated outlook is a subtle one, but includes an important shift in tone – the lowering of estimates due to a “coming recession.”

Wedbush’s Michael Pachter lowered estimates for Roku’s ARPU (average revenue per user) from 30% to 21% year-over-year growth in Q1, while for Q2 the figure is bought down from 40% to 26%. Year-over-year growth for FY20 is bought down to 20% from 24%. All, according to the analyst, are based on lower advertising demand in the face of a recession. “This reduces our Q1 estimates to the low-end of guidance with the FY:20 now below the low-end of guidance. We will revisit our estimates when the duration of the pandemic’s economic impact is more clear,” said Pachter.

As a result, estimated revenue comes down to $1.57 billion from $1.62 billion and adjusted EBITDA from -$11 million to -$12 million. Additionally, EPS is lowered from -$1.35 to -$1.54.

Comparing Roku’s current situation to another heavy hitter, Pachter noted, “Since we recently adjusted our model, Twitter withdrew its guidance as reflective of an increasingly volatile macroeconomic environment and uncertain advertising outlook. Specifically, higher impressions growth associated with pandemic news may not translate to previously expected revenue growth, due to CPM and advertising demand headwinds that are currently difficult to quantify. It is likely that ROKU will follow the same pattern as Twitter, where higher AVOD impressions are burdened by lower advertiser demand in the face of a looming recession.”

All in all, Pachter maintains a Neutral rating and $86 price target for Roku, implying the stock has a slight downside of 4% (To watch Pachter’s track record, click here)

Similar to Pachter, Wall Street isn’t completely sold on Roku. TipRanks analysis of 10 analysts shows a consensus Moderate Buy rating, with 5 analysts recommending Buy, 3 saying Hold and 2 suggesting Sell. The average 12-month price target on the stock is $136.60, representing nearly 52% increase from its current price. (See TipRanks’ Analysts’ Top Stocks)


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