What happened
Shares of Roku (ROKU 6.82%) turned sharply on Wednesday, declining as much as 8.6%. As of 12:36 p.m. ET, the stock is still down 8.2%.
What sent the streaming pioneer tumbling was negative coverage from a Wall Street analyst.
So what
Atlantic Equities analyst Hamilton Faber initiated coverage of Roku stock with an underweight (sell) rating while simultaneously issuing a price target of $136, according to The Fly. His new estimate would represent a potential loss for investors of roughly 39% over the coming year, compared with the stock's closing price on Tuesday.
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In a research note to clients, Faber wrote that Roku's growth has been primarily fueled by expansion of the Roku Operating System (OS), which the company licenses to small and midsize smart TV manufacturers in the U.S. He believes that growth will inevitably slow as the Roku OS reaches a saturation point among lower-tier television manufacturers and that the biggest TV makers won't be as eager to cede their platforms to Roku.
Additionally, most of Roku's growth has come from the U.S. market, and progress internationally has been markedly slower. Faber believes growth abroad won't compensate for the slowing growth at home.
Now what
Roku's stellar performance over the past several years has been undeniable as the company repeatedly demonstrated its ability to meaningfully grow its viewers -- and consequently its streaming hours. Growth in these metrics has decelerated over the past couple of quarters, which coincided with the loosening of COVID-related restrictions and with summer vacations.
In the third quarter, active accounts grew to 56.4 million, up 23% year over year, while streaming hours of 18 billion increased 21%. At the same time, however, average revenue per user (ARPU), which is perhaps a better measure of efficiency, climbed 49%. To put these numbers in context, active accounts and streaming hours grew 43% and 54%, respectively, in the prior-year quarter, while ARPU grew just 20%.
Furthermore, it's a leap to suggest that Roku won't redouble its efforts in international markets as it reaches platform penetration in the U.S.
Given Roku's record of success, this likely represents a buying opportunity for investors with a long-term view.
