Shares of streaming TV platform Roku (NASDAQ:ROKU) tanked earlier this week on news that telecom and media juggernaut Comcast (NASDAQ:CMCSA) would start giving away free streaming players to internet-only customers, a move that threatens to undermine Roku's growth. Pivotal Research Group initiated coverage on Roku today, slapping a sell rating on shares alongside a $60 price target, or less than half of yesterday's closing price.

Could Roku stock really get cut in half?

Roku OS 9.2 interface

Roku this week announced that Roku OS 9.2 would start rolling out soon. Image source: Roku.

Roku may still be overvalued even after "recent pullback"

Analyst Jeffrey Wlodarczak points to the Comcast news as evidence of intensifying competition in the over-the-top (OTT) video-streaming market, which will hurt both Roku's hardware business and its platform segment.

"We see dramatically more competition emerging that will likely drive the cost of OTT devices to zero and put material pressure on advertising revenue splits highlighted by Comcast's recent moves with its free Xfinity Flex product that is likely to be copied by other distributors," Wlodarczak wrote in a research note to investors titled, "Is Roku Broku?"

Roku refreshed its streaming player lineup yesterday, with price points ranging from $30 for a Roku Express to $100 for a Roku Ultra. The company also introduced a $180 soundbar earlier this month that doubles as a streaming player. However, Roku now acquires more users from licensed sources -- Roku TVs made by third-party manufacturers that integrate the platform -- than its first-party devices. Wlodarczak acknowledges that those partnerships have helped growth and should position Roku for international growth.

The Comcast move will hurt Roku's subscriber growth and average revenue per user (ARPU) opportunity, in Wlodarczak's view. The analyst says that Roku "deserves credit for the asset they have created," referring to the fact that it finished the second quarter with over 30 million active accounts, but that larger players that have greater leverage (like Comcast) are jumping in and will hurt Roku's growth prospects.

"The problem going forward, however, is that while the large Internet players have realized the importance of control of the mostly video pipe into the living room, now the players that actually control the dominant data pipe into the household in the U.S. (Comcast, Charter, Altice) have as well," the analyst said. Tech companies have been steadily expanding their influence in the living room in recent years, turf that telecommunications operators are trying to defend.

ROKU Chart

ROKU data by YCharts.

Roku shares have skyrocketed year to date, even after the selling pressure this week. That has led to a premium valuation of 11.5 times 2020 estimated revenue, according to Wlodarczak's estimates, which may not be justifiable considering the competitive threats that the company faces. The stock "still looks dramatically overvalued despite the recent pullback."

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