Roku Falls After Morgan Stanley Says Long-Term Earnings Potential Isn't Clear

Roku Inc (NASDAQ: ROKU) is a clear beneficiary of the ongoing shift towards video streaming, but for some Wall Street analysts, the long-term earnings potential isn't as clear.

The Analyst

Morgan Stanley's Benjamin Swinburne downgraded Roku's stock from Equal-weight to Underweight with a price target boosted from $25 to $30.

The Thesis

Roku's platform boasts 5,000 channels, but the top five channels represent 70 percent of time spent by consumers, Swinburne said in a note. But among the top five, the two biggest content partners, Netflix, Inc. (NASDAQ: NFLX) and Google's (NASDAQ: GOOGL) YouTube, don't contribute any material revenue for Roku given their massive leverage in their negotiations with Roku. If Netflix and YouTube gain even further share of time, then Roku's monetization opportunity from other channels will be more limited than what the stock is pricing in today.

While Roku has done a good job in doubling its platform revenue in 2017, it needs to now achieve a greater economic share from its content partners over time and sell that inventory advertisers to match Wall Street's expectations, Swinburne said. The problem is that Roku needs to compete with much larger online platforms like YouTube.

Hardware related sales are still expected to account for around half of Roku's consolidated revenues in 2018 and are likely to generate "minimal gross profits" as management is looking to increase product adoption through lower prices which in turn warrants a lower stock multiple.

Price Action

Shares of Roku were trading lower by more than 6.6 percent at $51.75 Thursday morning.

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