Roku shares tumbled about 14% on Wednesday, as Facebook announced a new multimedia device, while Comcast said it would offer its streaming box — the Xfinity Flex — free of charge to Internet-only customers. Friday, shares fell another 19%, as fears among investors over competition is intensifying.
Adding insult to injury, Pivotal Research analyst Jeffrey Wlodarczak has initiated coverage on ROKU with a Sell rating and $60 price target, which implies over 40% downside from current levels. (To watch Wlodarczak's track record, click here)
Looking at the industry, Roku is surrounded by sharks. From a device standpoint, its main competitors are Google and Amazon —collectively valued at almost $2 trillion on the stock market — while its content-delivery arm (The Roku Channel) is competing with an array of companies, including Netflix, Hulu, Amazon (Prime), as well as the new Apple TV+ and Disney Plus.
Indeed, Wlodarczak says increased competition “will likely drive the cost of OTT devices to zero and put material pressure on advertising revenue splits highlighted by Comcast’s recent moves with its free Xfinity Flex product that is likely to be copied by other distributors.” In other words, the money is not in devices, but in services and content, driven by ad and subscription revenue.
To this end, Roku is working on further developing TRC, to better compete with the content-distributors — Netflix, Hulu, Prime, etc. Through the Roku device, the channel offers free live TV and a collection of free TV shows and movies — including live TV from ABC News, — as well as premium subscription for the likes of HBO, EPIX and Showtime.
But while TRC is a growing and vital revenue segment, at its core, Roku is a device-maker and seller. Wlodarczak says, “Roku management deserves credit for the asset they have created," but “the living room is too important and the big boys with massive leverage are likely to make ROKU growth much more difficult.” As a result, the analyst believes the stock is “dramatically overvalued despite the recent pullback."
Overall, most of the Street is far more confident than Wlodarczak, with TipRanks analytics showcasing ROKU as a Moderate Buy. Based on 15 analysts polled in the last 3 months, 8 rate a Buy on ROKU stock while 5 saying Hold and 2 recommending Sell. The 12-month average price target stands at $124.36, marking a nearly 15% upside from where the stock is currently trading. (See ROKU's price targets and analyst ratings on TipRanks)
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