One of last year's hottest IPOs is cooling off as one the biggest losers of 2018. Shares of Roku (ROKU 8.96%) slipped 10.6% last week, tumbling after back-to-back days of analyst downgrades.
Benjamin Swinburne at Morgan Stanley kicked things off on Thursday, lowering his rating on the streaming media pioneer from equal weight to underweight. He feels the market has overreacted to November's blowout quarter, Roku's first financial report since going public at $14 in late September. Swinburne concedes that consumers are clearly shifting to over-the-top delivery of video entertainment, but he is still not sold on the long-term earnings potential of Roku in the migration.
Mark May at Citi followed a day later, slashing his rating on the stock from neutral to sell. He's more convinced about Roku's long-term growth outlook, but he feels that the stock has just gotten ahead of itself in its brief publicly traded tenure. More than just a valuation call, the analyst is also concerned about the post-IPO lock-up expiration of some shares in March, increased competition from tech titans, and the possibility of a quarterly report letdown after its stellar first financial performance.
Roku like a hurricane
A neat note about the back-to-back days of downgrades last week is that both Wall Street pros actually raised their price targets in the process. Swinburne went from $25 to $30, and May bumped his goal from $27 to $28.
Unfortunately for investors, even those higher price targets are well below where the stock is trading now. Roku stock soared 270% last year off its IPO price, and even bears have had little choice but to bump up their price goals to keep up.
November's quarter was a game changer. Hardware sales growth has largely stalled lately, but revenue growth is accelerating on the strength of its growing platform revenue. Roku is getting better about monetizing its growing audience, and it's no longer a matter of selling sticks as more and more smart TVs roll out with the service-agnostic Roku operating system.
There are now 16.7 million users leaning on Roku to access more than 5,000 streaming services, and engagement is growing. Platform revenue rose 137% in Roku's latest quarter, as a 48% surge in active accounts has been enhanced by more revenue-generating events per member.
Roku remains a popular bear target, though short interest did decline through the first half of last month. There's a fair argument to be made about the stock getting ahead of itself. Every growth stock deserves a breather every now and then. However, one also can't forget that these two now bearish analysts were neutral as the stock was racing into market fancy during the final two months of last year. Roku's user base is engaged, and there are advantages to its model unlike the larger tech players trying to push their own streaming services. Roku is unlikely to nearly quadruple again in 2018, but turning bearish on the stock before checking out next month's quarterly report -- Roku's second as a public company -- could be dangerous for bears given Roku's bullish momentum.