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Roku investors rethink streaming darling following record earnings

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Roku investors rethink streaming darling following record earnings

Roku Inc. had what was perhaps its best year ever in 2020, but Wall Street is starting to feel a bit cautious on the stock.

Roku shares dropped 7.1% during the week that included its record 2020 earnings release, in which the company reported fourth-quarter EPS of 49 cents per share, well above the S&P Global Market Intelligence consensus forecast of a loss per share of 4 cents. The drop in shares was matched by an increasingly uncertain view on the company's market prospects, according to an S&P Global Market Intelligence review of four analyst notes. While Roku carries an average "outperform" rating, according to S&P Global Market Intelligence's data on 20 analyst recommendations, four recent analyst notes put the company in "hold" or "neutral" territory, even while offering the company little other than praise.

For example, MoffettNathanson lead analyst Michael Nathanson compared Roku with the biggest streamers of 2021. Streaming platforms benefited greatly from the pandemic stay-at-home period, and "this dynamic can be best seen in the 2020 results at Netflix Inc., The Walt Disney Co. and now Roku, which just posted an extremely strong end to a stellar year," Nathanson said in a note on the company's earnings.

Roku reported 51.2 million active accounts on its cross-channel platform. That figure includes, but is not limited to, users that engage with its ad-based Roku Channel, which is an ad-supported streaming platform that spans partner networks, as well as accounts activated on Roku devices to purchase third-party apps and content.

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By comparison, Disney reported that Disney+, Hulu LLC and ESPN+ had a collective 146.4 million subscribers around the globe at the close of Disney's first fiscal 2021 quarter, ended Jan. 2. Netflix ended the year with about 203.7 million members in total.

Nathanson said despite Roku's continued growth, a "neutral" rating is nevertheless warranted, given Roku's sky-high trading multiples and its long-term prospects. Roku has added 821% in market cap over three years, with the plurality of those gains coming during a breakout in the second half of 2020. That compares to the S&P BMI Information Technology Index gain of 100.0% and the S&P 500 gain of 41.3% over the same time frame.

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"The company is trading on 34x (!) trailing 2020 revenues," the analyst noted (emphasis Nathanson's own). "Yet, as we know, the company is really trading on some narrative-based 2025 expectation that is impossible to pin down but gets re-affirmed with each and every quarterly beat."

Longer term, Nathanson sees a limit to Roku's competitive position under its current model.

Since Roku's streaming platform users are generally limited to its Roku-branded streaming devices and its ad-load is limited by consumers' patience, the analyst does not believe it has the same potential that a company like Netflix did at this point in its lifecycle. In turn, Nathanson gave Roku a "neutral" rating and a $410 target price.

Pivotal Research Group analyst Jeffrey Wlodarczak also expressed hesitation with Roku, even as he raised his price target to match the recent months of investor exuberance.

That analyst expressed regret for not moving Roku to a "buy" rating back in November of 2019, as the ticker has added 81% in value since. But to do so under the current valuation is not an option, he argued.

"Looking forward with interest rates rising materially and still arguably cheap economic rebound plays out there, we believe the broad outlook for tech is at least temporarily weakening. ... While ROKU has a very solid backdrop/outlook it is unquestionably expensive," Wlodarczak noted, leaving his "hold" rating unchanged while raising his price target to $400 from $240.

Wedbush Securities analyst Michael Pachter threw his "neutral" rating into the hat with a $475 price target and a more optimistic outlook.

Pachter said despite some limitations, the company will continue to benefit from the secular shift of advertising toward streaming and away from traditional television, a shift that gained momentum through the pandemic and could add mass as advertising recovers from the pandemic recession.

However, Pachter did note that Roku shares will likely remain volatile as investors question the rich multiple.

Lastly, Truist Securities analyst Matthew Thornton bumped his price target even above Pachter's but maintained a "hold" recommendation. Thornton noted that execution was strong in the fourth quarter and broadly in 2020. In fact, the company has met or exceeded EPS expectations for every quarter since the third quarter 2017.

Thornton raised his earnings forecasts for the company but noted "limited visibility" into the company's platform segment results, which is the fastest growing of its two lines of business. The platform segment, which entails its streaming business, comprises direct sales of ads, a cut of ad dollars collected by partner networks in The Roku Channel and charges on sales of third-party apps and video-on-demand sales.

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