Shares of digital streaming-media player maker Roku (ROKU) tumbled nearly 4% in early Tuesday trading before rebounding higher, following a downgrade from RBC Capital Markets analyst Mark Mahaney to Sector Perform from Outperform.
Mahaney said the the stock has “dramatically outperformed the market,” up nearly 200% versus the 18% return on the S&P 500 (^GSPC) year-to-date.
“Given what we view as sustainably robust growth and profitability levels, we believe ROKU’s YTD outperformance is fully justified,” Mahaney wrote in a note to investors. “However, with the stock now trading at an intrinsically robust multiple – 11x ’19E P/S, we see risk – reward as less compelling. Hence the downgrade.”
Still, Mahaney and team point out that their fundamental long thesis and $90 price target remain fully intact, adding that they would be constructive again on any major stock pullback.
“We view ROKU as one of the best plays on ad-supported OTT, with the company being one of the best-positioned to take share of the very large, underpenetrated $70B TV Ad spend opportunity,” Mahaney said.
According to Strategy Analytics, Roku is the dominant streaming platform in the U.S., with a 36% lead over the No. 2 provider Sony (SNE) PlayStation. Roku has about 22 million monthly active users, with 10.6 billion hours of content streamed in the first half of 2018. Upcoming OTT launches with Disney+ (DIS) and Apple+ (AAPL) could also act as near-term catalysts.
While Mahaney highlights Roku’s “very consistent financial track record thus far,” he also points out a few risks to his rating and price target - including heightened competition, a concentrated content base from Netflix (NFLX), YouTube (GOOGL) and Amazon (AMZN) as well as the ongoing lack of profitability.
Looking at the analyst coverage universe, there are currently 7 buy-rating equivalents, 7 Hold and 2 Sell-rating equivalents on Wall Street.
Iryna Kirby is a Producer for Yahoo Finance. Follow her on Twitter at @IrynaNesko.