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Roku Should Bounce Back From a Tough-Luck Tuesday

By Rick Munarriz – Jul 27, 2022 at 10:10AM

Key Points

  • Roku had an analyst downgrade and another initiating coverage with a neutral rating on Tuesday.
  • A report of Comcast potentially buying Vizio also ate into Roku's performance.
  • Roku shares fell 8% on Tuesday, but even a so-so report on Thursday could be seen as a positive.

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Roku's facing some serious headwinds heading into a telltale financial update.

When it rains it pours, and for Roku (ROKU 1.22%) Tuesday was a bit of a deluge. Shares of the streaming video pioneer fell 8% as a pair of uninspiring analyst updates came out. Roku's bad situation was made worse by a report of a potential acquisition that doesn't include Roku but could have market implications. 

Wolfe Research analyst Peter Supino downgraded the stock from peer perform to underperform. Aaron Kessler at Raymond James initiated coverage of Roku with a neutral market perform rating, raising near-term concerns. Adding more uncertainty into the mix, Protocol leans on three unnamed sources claiming that Comcast (CMCSA -2.04%) is considering a buyout of Vizio (VZIO -1.32%). What does this all mean? Let's break it all down.

Two people huddling together on a couch as a scary movie plays on TV.

Image source: Getty Images.

Wall Street weak

Roku reports its second-quarter results after Thursday's market close, so negative attention from the analysts that are following the company closely isn't a good sign. Supino's downgrade at Wolfe Research stems from his reduced forecast for net user additions. He feels that supply chain issues that have tripped up Roku's production on streaming devices, inflationary pressures on consumers to pare back spending, and poor prospects for converting hardware sales to new registrations will weigh on its near-term performance. High costs to successfully expand its platform overseas and build up its content catalog will be problematic. His $77 price target is just below Tuesday's close, and that was with the 8% drop.

Kessler at Raymond James doesn't have a price target on the stock, but he did pick up coverage of Roku with a ho-hum market perform rating. He sees near-term headwinds impacting the advertising market. He is encouraged by the marketer shift in spending from linear to connected TV, but the need for Roku to invest in growing its business should hurt the bottom line.

Tuesday's worrisome analyst notes followed JPMorgan's Cory Carpenter lowering his price target on the stock on Friday of last week. The silver lining is that he's still bullish on the stock, but slashing his price goal from $175 to $150 isn't very encouraging less than a week before Roku's financial update. 

Carpenter also nudged his price target for Vizio lower late last week, and that brings us to the new buyout chatter and its impact on Roku. Vizio is struggling. Revenue has declined in back-to-back quarters, as gains for its Roku-like streaming platform have been no match for the slide in its smart TV sales. 

Vizio's SmartCast is not Roku. It has a quarter of the audience, generating a little more than half of its average revenue per user. Comcast is a cash-flow beast with its flagship broadband and cable businesses, but its attempts to become a force as a streaming hub have failed so far. Buying Vizio would be a way for Comcast to become a more meaningful player in this niche, and that would explain why Roku investors aren't happy about the potential development.

Roku continues to be a leader among streaming video stocks, despite plummeting more than 80% from last year's highs. With three different analysts chiming in with less than glowing reports in the week leading up to fresh financials, the sentiment is clearly negative. The silver lining here is that a soft report is already widely expected. Even a modest showing can send the stock higher. The market may also be reading too much into buyout chatter between Comcast and Vizio that wouldn't make much of a difference to Roku even if it does somehow happen. Roku is down, but it's not out.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rick Munarriz has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$58.89 (1.22%) $0.71
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$30.26 (-2.04%) $0.63
Vizio Holding Corp. Stock Quote
Vizio Holding Corp.
VZIO
$9.69 (-1.32%) $0.13

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