What fun would a rollercoaster be if it only went up? That’s my sage bit of wisdom to you Roku (NASDAQ:ROKU) investors out there who woke up this morning a few pounds heavier and about $25 per share lighter. Roku shares dropped almost 15% after analysts downgraded their outlook on the streaming business.
Apparently, the guys over at Morgan Stanley (NYSE:MS) brought their work home with them for Thanksgiving as they downgraded their rating of Roku stock from “equal weight” to “underweight” on Monday morning. I’m just thankful to be wearing matching socks on a Monday morning after a long weekend, but I guess that’s why I’m not working for Morgan Stanley.
Why was Roku downgraded?
Morgan Stanley analyst Benjamin Swinburne predicts that “revenue and gross profit growth [will] slow meaningfully in ’20”. He attributed the company’s meteoric rise this year to an “exuberance over all things streaming” and views the risk profile of the company as skewed to the downside. Out of 18 analysts tracked by Bloomberg, he is one of only 3 to recommend a ‘sell’ on Roku stock.
The downgrade has sparked a big sell-off in Roku shares, with many investors pocketing their profits and jumping ship. Roku stock has been one of the biggest performers of the year so far. Before this slump, it was up almost 400% since January 1st. However, it has been anything but a smooth rise. This sell-off isn’t even the biggest to occur this month! On November 7th the stock took a 16% dip after a poor earnings call. Small fries when compared to the 28% nosedive in September when Comcast (NASDAQ:CMCSA) announced it would be producing a similar product for free for its internet customers.
What is the outlook for Roku?
With fast growth comes high volatility. This is clear from the multiple sell-offs Roku has gone through. Yet it remains one of the performers of the year, exciting many investors with the potential to be the big winner of the streaming wars. Its agnostic service will benefit from the big names like Disney (NYSE:DIS), Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX) battling it out for our TV screens, and as the number of players grows, the need for a service like Roku grows with it.
Disney+ is just one of the ways Disney Makes Money.
However, it’s current rate of growth is not going to be sustainable long term and as multiple streaming services become the norm, competitors will begin to enter the market. The question for investors is: do you believe in Roku to hold on when slowing growth and competitors come knocking on the door? Some guy from Nebraska once said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” While there is nothing wrong with cashing in profits, could Monday’s sellers be rueing this decision over the next few years?
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Disney, Apple, Roku and Netflix. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.