Morgan Stanley Downgrades Roku But Lifts Price Target

Roku has been having a stellar year this year but one analyst isn’t feeling so hot about the stock moving forward.

This week Morgan Stanley lowered its rating on Roku to underweight from equal weight, and said that the stock’s phenomenal climb this year fully reflects the company’s growth prospects and fails to recognize some key risks.

Shares of the stock fell a whopping 15.2% on Monday.

“Roku shares are up over 400% YTD due to rising estimates and overall exuberance over all things streaming. As a result, we see the risk/reward skewed to the downside. Roku’s valuation levels have surged past digital media players and even past high-growth SAAS [software as a service] companies … despite structurally lower gross margins,” said Morgan Stanley analyst Benjamin Swinburne.

The analyst noted a slowdown in active-account growth in the latest quarter, on a year-over-year basis.

According to Swinburne, Roku benefitted in earlier quarters from its partnership with television maker TCL, which helped the company grow its active-account base since the Roku operating system became embedded in TCL sets. Without major new partnerships, Swinburne believes active net account additions to keep moderating going forward.

Despite the downgrade, Swinburne raised his price target on Roku shares to $110 from $100.

Disclaimer: We have no position in Roku Inc. (NASDAQ: ROKU) and have not been compensated for this article.