Roku's stock falls 23% - and one bear now sees challenges brewing 'on all flanks'

By Emily Bary

Roku's first-quarter ad-revenue outlook may have underwhelmed, but some analysts flag broader concerns

Roku Inc. shares are on track to shed almost a quarter of their value Friday, and one analyst sees the media-streaming company "at the precipice of being squeezed by the emergence of challengers on all flanks."

MoffettNathanson analyst Michael Nathanson has been worried that Roku's (ROKU) "first-mover advantage in streaming connectivity" could dwindle as bigger players encroach on its turf, and he now wonders if a tipping point is on the horizon.

"On the device side, as the market has shifted from smart devices to smart televisions, Roku faces the difficulty of holding operating market share in an increasingly tight market that includes Amazon (AMZN) and the largest global [equipment makers] that want to do it themselves or at least get a revenue share," he wrote.

Plus, Walmart Inc. (WMT) reportedly is interested in acquiring television maker Vizio Holding Corp. (VZIO), the Wall Street Journal reported earlier this week. That deal could hurt Roku in a key retail channel if it were to happen.

Vizio declined to comment on the prospect of a deal, while Walmart didn't immediately return a MarketWatch request for comment.

Nathanson also worries about Amazon.com Inc.'s (AMZN) recent move to make advertisements the default for Prime Video viewers, "a material shift in the [connected TV] advertising landscape" that he thinks will prove "deflationary" to overall ad prices.

He rates the stock a sell with a $66 target price.

Read: Jeff Bezos sells more Amazon stock, bringing total to $6 billion this month

Looking at Roku's latest results and guidance, which the company posted Thursday afternoon, Piper Sandler analyst Matt Farrell said that Wall Street seemed disappointed that the company implied platform revenue could grow at a similar rate in the first quarter to what was seen in the fourth quarter, even though he deems comparisons to be easier now.

"The lack of platform-revenue acceleration in Q1 (and likely decelerating growth through 2024) bucks a trend seen for most of 2023," he wrote. "The narrative around Amazon Prime Video Ads and the potential Wal-Mart/Vizio transaction also create some noise around the story as well."

Farrell said he'd "rather wait for more clarity on the platform business before getting constructive," though he acknowledged that Roku's improvements to free cash flow and roughly $2 billion cash pile were "hard to ignore."

Farrell rates the stock at neutral with an $81 target.

Oppenheimer's Jason Helfstein moved to the sidelines on Roku shares, writing that the stock could struggle for momentum until the company "sustainably" can grow platform revenue at a high-teens rate. He expects 9% growth for most of 2024.

"While we are positive on new [management's] strategy to embrace [third-party] programmatic demand and increase data integration to drive performance-based campaigns, a high percentage of platform revenue is driven by [streaming] advertising, [streaming] price increases, and media & entertainment advertising," he wrote. "These areas are expected to struggle for most of [2024]."

Helfstein cut his rating on Roku shares to perform from outperform.

Wedbush's Alicia Reese was more upbeat, calling the company's latest results "almost perfect."

"Despite industry-wide headwinds like lower media & entertainment ('M&E') spending, we think Roku's initiatives will result in revenue growth higher than we modeled which, together with improved expense management, should drive consistent Ebitda growth," or growth in adjusted earnings before interest, taxes, depreciation and amortization, she wrote.

-Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

02-16-24 1440ET

Copyright (c) 2024 Dow Jones & Company, Inc.