Roku's Stock Drops 23% - and One Bear Sees Challenges Brewing on All Sides

Roku Inc. is facing a significant decline in its shares, with a potential loss of nearly a quarter of their value on Friday. Analyst Michael Nathanson from MoffettNathanson expresses concern about Roku's position, suggesting that the media-streaming company is on the brink of being challenged by emerging competitors from all sides.

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Nathanson has been apprehensive about Roku's "first-mover advantage in streaming connectivity," anticipating a diminishing edge as larger players encroach on its market share. He notes that as the market shifts from smart devices to smart televisions, Roku struggles to maintain operating market share in an increasingly competitive landscape, including major players like Amazon and global equipment makers seeking a share of the market.

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Adding to the challenges, there are reports that Walmart is considering acquiring television maker Vizio Holding Corp. Such a deal could potentially harm Roku's position in a crucial retail channel. While Vizio declined to comment on the deal, Walmart has not responded to inquiries.

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Nathanson is also concerned about Amazon's recent decision to make advertisements the default for Prime Video viewers, a move he sees as a significant shift in the connected TV advertising landscape. He believes this shift will have a "deflationary" impact on overall ad prices. Consequently, he rates Roku's stock as a sell with a target price of $66.

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Piper Sandler analyst Matt Farrell, assessing Roku's latest results and guidance, notes Wall Street's disappointment that the company implied platform revenue growth in the first quarter would be similar to the fourth quarter. Despite easier comparisons, the lack of acceleration in platform revenue in Q1 and anticipated decelerating growth through 2024 goes against the trend observed in most of 2023. The potential impact of Amazon Prime Video Ads and the rumored Walmart/Vizio transaction adds noise to the narrative. While Farrell acknowledges Roku's improvements in free cash flow and a substantial cash pile of around $2 billion, he remains cautious and rates the stock as neutral with an $81 target.

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Oppenheimer's Jason Helfstein shifts to a more conservative stance on Roku shares, suggesting that the stock may struggle for momentum until the company can sustainably achieve high-teens growth in platform revenue. He expects a 9% growth rate for most of 2024 and downgrades Roku shares from outperform to perform.

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On a more positive note, Wedbush's Alicia Reese views Roku's latest results as "almost perfect" despite industry-wide challenges like lower media and entertainment spending. She believes Roku's initiatives will lead to higher revenue growth than modeled, coupled with improved expense management, driving consistent Ebitda growth (adjusted earnings before interest, taxes, depreciation, and amortization).

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