Roku Inc (Nasdaq: ROKU) stock got off to a hot start following its initial public offering last year, but the stock has hit the skids so far in 2018. Morgan Stanley analyst Benjamin Swinburne says Roku stock has finally settled into an appropriate valuation, and it could spring back to life if the company can provide some much-needed clarity for investors.
After pricing its IPO at $14 in September, Roku stock hit the ground running and finished 2018 above $50 per share. This year, however, market enthusiasm for Roku has waned, and shares are now down about 25 percent year-to-date.
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Swinburne says the market will be more comfortable with Roku trading back at a higher valuation once the company provides investors with a bit more insight into its business.
“Greater disclosure into revenue composition and magnitude of monetizable inventory would increase conviction in estimates, supporting further upside,” Swinburne says.
Swinburne had previously been bearish on Roku stock following its 2017 run, but he says the 2018 pullback coupled with solid user growth and positive monetization trends has now changed his mind.
Swinburne says Roku currently trades at an appropriate multiple of about 6.5 times Morgan Stanley’s projected 2019 platform sales estimate. Roku’s valuation is currently between the valuation of Netflix ( NFLX), which is about 8 times 2019 platform sales, and the valuation of Spotify Technology ( SPOT), about 3.5 times 2019 platform sales. At its 2017 peak price, Roku stock was trading at roughly a 50 percent forward sales multiple premium to Netflix.
Despite the potential upside, Swinburne says investors still need to be cautious about Roku stock. At this point, the company has not revealed a detailed long-term plan for its advertising business, and it is facing increasing competition from both Amazon.com ( AMZN) and Alphabet ( GOOG, GOOGL).
“Roku’s earnings story is about advertising, which is still in its early stages, with low visibility into the monetizable hours streamed on the platform,” Swinburne says.
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However, he says Roku should continue to benefit from the long-term secular shift in TV viewing from traditional distribution methods to over-the-top streaming models.
Morgan Stanley has an “equal-weight” rating and $38 price target for ROKU stock.
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Roku Inc Investors Need More Clarity originally appeared on usnews.com
