Please ensure Javascript is enabled for purposes of website accessibility

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.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.