What happened

Shares of Roku (NASDAQ:ROKU) have popped today, up by 5% as of 12:40 p.m. EST, after a Wall Street analyst increased its price target on the stock. Morgan Stanley boosted its valuation estimate on Roku shares from $110 to $150 while remaining bearish overall.

So what

Analyst Benjamin Swinburne reiterated an underweight (equivalent to sell) rating on the streaming TV technology company, after initially downgrading Roku shares nearly a year ago over valuation concerns. The analyst expects Roku to grow its gross profits at a compound annual growth rate (CAGR) of approximately 30% over the next three years, and the price target is based on a valuation multiple of 18 times expected gross profits for 2022.

Flatscreen wall-mounted TV displaying The Roku Channel next to a sideboard, a side table, and a potted plant

Image source: Roku.

Swinburne justified the bearish rating by arguing that "the stock is already pricing in a streaming market in which 1) Roku addresses a large [total addressable market] and 2) has dominant share." In other words, the analyst is still worried about Roku's overall valuation while acknowledging the company's success in becoming the leading streaming TV platform.

Now what

Roku is scheduled to report third-quarter earnings results tomorrow after the market closes. Swinburne is modeling for platform revenue of $300 million in the third quarter, which the analyst expects to yield gross profits of around $168 million (representing a platform gross margin of 56%). Roku did not provide a formal outlook due to ongoing uncertainty related to the COVID-19 pandemic, but consensus estimates call for third-quarter revenue of $366.3 million and a net loss per share of $0.40.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.