Shares of Roku fell 14% after being downgraded by a Morgan Stanley analyst.
Without a doubt, Roku has been one of the biggest stocks of 2019. Its shares are up 336% year to date, and the company continues to beat its sales targets and exceed investor expectations.
But on Monday, the stock nosedived more than 14% after being downgraded by Morgan Stanley. Analyst Benjamin Swinburne increased his price target on the stock but downgraded it to a sell rating.
Let’s look at why Morgan Stanley downgraded the stock, and what this means for Roku going forward.
The reasoning behind the downgrade
It may seem surprising that anyone would downgrade Roku after the outstanding year the company’s had. But according to Swinburne, the company’s shares have risen so much they are currently overvalued.
He added that in spite of the company’s “sound strategy” to cash in on the streaming market, problems might lie ahead. In particular, Swinburne believes that the company’s ad revenue growth will slow considerably over the next year.
Most of Roku’s revenue comes from its ad revenue sales. In 2019, the company’s ad revenue grew by 91%. In 2020, Swinburne is predicting this growth will slow to 57%.
For its part, Roku declined to comment on the downgrade.
Is there any merit to the downgrade?
Last week, Roku’s stock topped $165 per share, and as of today, the stock fell below $135 per share. So obviously, the Morgan Stanley report holds a significant amount of weight with many investors.
But should it? The company exceeded expectations on its previous earnings report, and it has stated that it expects to exceed its 2019 guidance as well.
However, the company still isn’t profitable. And Roku’s shares are expensive to buy right now.
But Roku has a lot of room to continue to grow in the coming years, especially since the company is only just now starting to expand into Europe. Streaming services are in-demand right now, and Roku is well-positioned to cash in on this trend.
Final thoughts
It should be noted that most Wall Street analysts don’t share Morgan’s Stanley’s views on Roku. Out of the 13 analysts reviewing the stock, nine consider it a buy.
The company’s shares are pricey right now, so new investors may be hesitant to jump on board. But for current investors, it may be worth it to hang on a while longer.
