Keybanc analyst Justin Patterson, a long-time Roku bull, downgraded shares to Sector Weight from Overweight on Monday, citing profitability concerns as consensus estimates for 2023 and 2024 appeared too optimistic. Keybanc did not put a price target on Roku shares, and the firm had previously maintained a $72 price target on the stock.
After this news, the stock of Roku dropped by 4% in pre-market trading on Tuesday, and is down more than 75% year-to-date.
Five firms, including KeyBanc, have downgraded Roku shares over the past month, with 12 month consensus price targets averaging around $59 a share. According to Bloomberg's data, analyst recommendations on the stock amount to 13 Buys, 12 Holds and 6 Sells.
Patterson pointed out that previously bullish expectations - like outsized growth in connected TV advertising, as well as Roku becoming a critical platform for media partners - have not materialized, further dampening the company's outlook.
Patterson wrote that Roku appears to be ceding market share, and that it has more tech debt in its AdTech stack than we anticipated. Resolving these issues will require sustained investments, leaving current revenue and gross profit growth estimates - along with 2024 profitability targets - challenged, according to Keybanc's view.
Patterson wrote that we believe that the share losses and lack of profitability warrant a discount compared to peers.
The tech sector was hit by a wave of layoffs earlier this month, and Roku said it would lay off 200 workers. Patterson believes that the streaming giant will not be able to pull back investment areas in North America, International TVs, content, and ad tech, despite the headcount reduction.
He said that he believes that ROKU offers little upside from current levels, even after headcount reductions, we struggle to achieve EBITDA profitability by 2024 E and project a loss of $79 M. Roku beat estimates in its third quarter, but warned investors it expects fourth quarter revenue to drop 7.5% on a year-over-year basis to roughly $800 million. The stock fell more than 20% on the news, as a result of the weak guidance.
We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or rebound. Alexandra is a senior entertainment and media reporter at Yahoo Finance. Follow alliecanal 8193 on Twitter and email her at alexandra.canalyahoofinance.com.