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Roku: Why RBC downgraded a Wall Street darling that’s tripled in value

Iryna Kirby

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.

Roku has greatly outperformed the broader markets this year, rising nearly 200% 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.

Strategy Analytics: Roku dominated the streaming device market in the first quarter.

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.

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