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The Ratings Game: Roku stock plunges after downgrade; estimates ‘are just too damn high,’ says analyst

Shares of Roku Inc. are getting pummeled Wednesday after an analyst downgraded the stock and suggested that investors have misinterpreted the company’s story as of late.

“When a stock goes up on a series of strong and better than expected results, few probing questions are ever asked as the outperformance is usually a confirmation of an investment thesis,” MoffettNathanson’s Michael Nathanson wrote Wednesday.

Accordingly, he argues that investors may have been too upbeat about the extent that Roku’s
ROKU,
-10.29%

advertising performance helped drive its results while understating the impact of new streaming launches.

Nathanson cut his rating on Roku’s stock to sell from neutral, while lowering his price target to $220 from $330. “Simply put, we think our and the Street’s long-term revenue and earnings estimates are just too damn high,” he wrote.

By his math, “it appears that Roku will need to monetize an absurdly high portion of long-tail AVOD [ad-based video-on-demand] impressions to come even close to Street numbers, which we think will be a challenge given rising competitive pressures in TV OEMs [original equipment manufacturers] and operating systems,” he continued.

Roku’s stock sank 9.8% in morning trading, putting them on track to suffer the biggest one-day selloff in a year, and to close at a one-year low.

Nathanson believes Roku has “especially benefited from the launch of new DTC [direct-to-consumer] services over the past year,” but he worries about how that momentum will continue.

“The amount of revenue allocated to remaining performance obligations from content distribution agreements has notably increased since 2Q 2020, but we believe these performance obligations should begin to moderate,” as Roku continues to lap the launches of new streaming services, Nathanson said.

By Nathanson’s estimations, Roku added about $79 million in new performance obligations during the third quarter, “whether from new distribution agreements or revaluation of existing agreements.” That amount is “meaningfully lower than the estimated $450+ million added each in 1Q 2021 and 2Q 2021,” he wrote, which he sees as reflective of a “potential slowdown” in streaming purchases and promotional spending on Roku’s service.

Of the 28 analysts tracked by FactSet who cover Roku’s stock, 21 have buy ratings, four have hold ratings, and three have sell ratings, with an average price target of $387.96.

Shares of Roku, which are headed for the lowest close since Nov. 18, 2020, are up 5.2% over the past 12 months, but have lost 30% over the past three months. The S&P 500 index
SPX,
-0.12%

has rallied 30.0% over a 12-month span and gained 5.5% over a three-month span.

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