Roku's stock gets a boost as a former bear rethinks his view

By Emily Bary

MoffettNathanson moves to a neutral stance on Roku shares

Roku Inc.'s profit picture is improving, and that prompted one analyst to rethink his bearish call Tuesday.

MoffettNathanson analyst Michael Nathanson upgraded Roku shares (ROKU) to neutral from sell in his latest note to clients, writing that the company has made progress in improving its cost base to the point where it's difficult to see "meaningful downside" ahead for the stock.

Nathanson is ahead of the consensus view with his expectations for adjusted earnings before interest, taxes, depreciation and amortization through 2025, even though he's more pessimistic than the crowd on revenue trends over that span.

"Despite our concerns about rising competition in Roku's two key revenue segments -- devices and advertising -- we believe that the intensifying focus on achieving real profitability and free cash flow (not just adjusted Ebitda) reduces the risk of the shares from de-rating further," Nathanson wrote.

See also: Lyft could soon give investors more transparency. That may not be a good thing.

"Note that this isn't a call on a stronger top-line or healthier scatter market for Roku; instead, it is simply one of raising profitability forecasts above consensus and the stock reaching our $55 price target," he added.

Nathanson's upgrade comes a day before Roku is expected to post third-quarter results. While Roku's management upped its revenue outlook in early September, Nathanson anticipates "a less rapid acceleration of advertising revenues into the fourth quarter" and wonders if recently disclosed job cuts could be an ominous signal.

See also: Roku plans to lay off 10% of staff, boosts revenue outlook

"To us, Roku taking these latest cost actions signals potential weakness in top-line growth," he wrote.

Roku shares are up 40% so far this year, factoring in a roughly 1% boost early in Tuesday's session.

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-Emily Bary

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10-31-23 0947ET

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