Roku Valuation Seen Difficult to Sustain Due to Gross Margins, Profit Declines, Morgan Stanley Says

8:58 AM, Dec 2, 2019 — Roku’s (ROKU) current valuation premium is going to be difficult to sustain as the streaming-media platform sees declines in gross margins and moderating gross profit, Morgan Stanley said Monday while cutting its rating on the company while lifting its price target.

“We are bullish on Roku’s growth prospects,” said analyst Benjamin Swinburne, while lowering his firm’s rating on San Jose, Calif.-based company to underweight from equal-weight and raising its price target $10 to $110. “However, 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.”

Moody’s said Roku’s valuation level have risen higher than other digital media players and software as a service companies, even with its “structurally lower gross margins.”

Roku share were about 7.7% lower in pre-market trading.

Swinburne said a correction in Roku’s shares may be driven by quicker-than-forecast pressure on gross margins that is already showing up in the company’s recent results and guidance, slower active account growth and fewer new original equipment manufacturer partners, and a longer timeline for it to monetize international opportunities.

Moody’s said Roku’s active account growth has benefited from its single OEM partnership with TCL. However, active net account additions declined year over year in the third quarter for the first time since the first quarter of 2017, “and it is likely to continue to moderate in the US without new OEM partners,” it added.

Swinburne also said competition is more than recognized as more internet-enabled set-tops from cable and satellite providers, and its advertising business will see slowing growth.

“This has been the case with other emerging digital, advertising businesses like Snap and Twitter, where rather than face modestly, growth slowed dramatically,” he said.

Still, Morgan Stanley said, Roku’s shares have avoided a “momentum growth selloff” seen recently, likely due to the launches of AppleTV Plus and Disney Plus in the past few weeks.

Price: $160.37, Change: $-1.27, Percent Change: -0.79%