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StockBeat: Roku Slumps as Morgan Stanley Sounds Alarm on Valuation

Published 12/02/2019, 01:13 PM
Updated 12/02/2019, 01:55 PM
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Investing.com – Roku (NASDAQ:ROKU) shares fell sharply on Monday after Morgan Stanley sounded the alarm on the streaming media platform's valuation amid rising competition and slowing growth.

Morgan Stanley's Benjamin Swinburne downgraded Roku to underweight from equal weight but raised his price target on the stock by $10 to $110. That was hardly an endorsement Roku (NASDAQ:ROKU) was off more than 13% at $139.32 early Monday afternoon after plunging as much as 17.3%.

With the phenomenon of consumers giving up cable in favor of streaming services in full swing, Roku has seen its shares rise as much as 476% on the year. The shares are still far too expensive, Swinburne warned.

"Roku shares are up over 400% (year to date) due to rising estimates and overall exuberance over all things streaming," he said. "As a result, we see the risk/reward skewed to the downside."

The streaming media platform is unlikely to generate the growth needed to justify its frothy valuation at a time when rising competition may well syphon off advertising dollars that would have previously made its way to Roku, according to Swinburne.

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

Roku has done little to alleviate fears of slowing growth after reporting weaker active-account growth in the latest quarter, on a year-over-year basis.

For the moment, however, Roku has managed to avert the "momentum growth selloff" seen recently, thanks to the launches of AppleTV Plus and Disney+ in the past few weeks, Swinburne added.

The shares are down more than 21% since peaking at $176.55 in early September.

Sentiment on Roku was also soured by reports that, starting Dec. 1, Netflix (NASDAQ:NFLX) ended support for older Roku Players, Vizio TVs, and some Samsung (KS:005930) smart TVs.

Customers using the older Roku players would likely need to purchase a new streaming device to continue watching content with their (NASDAQ:Netflix) subscription.

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