Share of Roku (NASDAQ:ROKU) have surged in 2019. Between Jan. 1 and last Friday, the stock had climbed 213%, easily beating the S&P 500's 13% gain over the same time frame. The gain was been fueled by the streaming-TV company's strong underlying growth as active accounts, streaming hours, and average revenue per user soared.
But Roku stock pulled back on Tuesday, following one analyst's warning that the stock's valuation may have gotten ahead of itself. Shares of Roku are down nearly 6% as of 2:20 p.m. EDT on Tuesday. Is this analyst's warning worth some consideration?
The bar is high
"We believe the recent run and higher valuation ... combined with raised expectations ... creates increased [near-term] risk," said Stephens analyst Kyle Evans in a note to investors on Tuesday (via Barron's). The analyst kept his $84 12-month price target for the stock, but lowered his rating on shares from equal weight to overweight.
Even after the stock's pullback on Tuesday, Roku shares are trading at about $90 -- $6 above Evans' price target.
Making a case for near-term risk associated with the stock's valuation after its recent run-up, Evans reminded investors of the stock's 22% decline last year following Roku's third-quarter results. Worse-than-expected platform revenue for the period spooked investors.
With shares up 194% year to date, even including the stock's retreat on Tuesday, Roku's valuation has similarly changed. The stock now has a price-to-sales ratio of 12.4, up from a ratio below five when the year started. This higher valuation makes shares at risk of another sharp decline if Roku's quarterly results miss expectations.
The hype is real
While Roku stock may indeed be at risk of a big pullback in the near term thanks to the market's frothy expectations for the company, Roku's momentum is undoubtedly impressive -- and worthy of a steep premium.
Roku's first-quarter revenue increased 51% year over year -- a significant acceleration compared with Roku's 45% revenue growth in its fourth quarter of 2018. Platform revenue increased 79% year over year, helped by gains in the company's share of subscription, transactional, and ad revenue on its platform.
"The shift to streaming and away from linear TV and legacy distribution platforms has enormous momentum," management said in the company's first-quarter shareholder letter. "We estimate that in Q1 2019, more than one-in-three smart TVs sold in the U.S. were Roku TVs, making the Roku OS the No. 1-selling smart TV OS in the U.S."
Though investors considering buying the stock at this level may want to think twice, the company's notable execution hasn't given current shareholders a reason to sell.