Roku downgraded to 'sell' as Moffett Nathanson warns of overvaluation, risks

Investing.com -- Analysts at Moffett Nathanson downgraded Roku (NASDAQ:ROKU ) to a "sell" rating in a note dated Friday, citing concerns about the company's valuation, competitive landscape, and profitability.

Shares of the company were down 2.9% at 09:31 ET (14:31 GMT).

The brokerage suggests that optimism surrounding Roku is misplaced, with unrealistic market expectations and mounting industry challenges.

One major factor behind the downgrade is what Moffett Nathanson describes as speculative claims about Roku being a potential acquisition target.

 While there has been buzz around potential buyers like Amazon (NASDAQ:AMZN ), Target (NYSE:TGT ), and The Trade Desk (NASDAQ:TTD ), analysts dismissed these theories as lacking credibility. For instance, Amazon, a direct competitor in the connected TV space, would likely face regulatory scrutiny if it attempted to acquire Roku. 

Similarly, Target, facing financial strain and lacking expertise in advertising, is considered an improbable acquirer. The Trade Desk, which recently announced its own CTV operating system, has publicly emphasized maintaining its independence, further weakening the acquisition narrative.

Moffett Nathanson also highlights the risks posed by Walmart’s acquisition of Vizio, which directly impacts Roku’s largest retail partnership. 

Walmart (NYSE:WMT ) accounts for about 25% of Roku’s device revenues, and the integration of Vizio into Walmart’s ecosystem is expected to intensify price competition and erode Roku’s device margins.

Roku’s financial performance, especially in its devices segment, continues to be a concern. 

The company’s strategy of selling hardware at a loss to drive platform monetization has placed its device gross margins under increasing pressure. 

With Walmart-Vizio’s entry into the market and rising competition from other players, analysts foresee no immediate pathway for Roku’s device segment to achieve profitability.

On the platform side, Moffett Nathanson has adjusted its revenue growth and gross margin forecasts downward, citing a slowdown in media and entertainment advertising and moderated growth in streaming service distribution revenues. 

Advertising, which constitutes a big portion of Roku’s platform income, faces headwinds from heightened competition and changing dynamics within the streaming industry. 

Netflix (NASDAQ:NFLX ) and Disney (NYSE:DIS ) do not share subscription revenues with Roku, and many streaming platforms are expected to renegotiate revenue splits in the near future.

In their revised outlook, Moffett Nathanson projects a long-term price target for Roku at $55, significantly below the current trading price of $83, representing a 34% potential downside. 

The analysts attribute this downgrade to a reassessment of Roku’s EBITDA forecasts and a recalibrated valuation model.

Source: Investing.com