The Ratings Game: Roku stock tumbles as analysts say modest beats fail to justify massive rally

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Roku Inc.’s massive 2019 rally took a hit Thursday as the company failed to live up to what analysts said were high expectations.

Though both revenue and earnings came in ahead of estimates for its latest quarter, the beats were smaller than what Roku ROKU, -11.29%  recorded earlier in the year. The internet streaming company also delivered a mixed outlook. The stock was down 12% in Thursday morning trading.

“Roku reported a generally solid 3Q with platform revenue, active accounts, streamed hours, and [earnings before interest, taxes, depreciation, and amortization] all above consensus, though with platform gross profit $1 million below consensus and the magnitude of revenue/gross profit upside (relative to guidance) the second lowest/lowest since coming public,” wrote SunTrust Robinson Humphrey’s Matthew Thornton, who rates the stock a hold.

Wedbush’s Michael Pachter called the results “less impressive than the elevated share price required” and commented that while Roku has a number of growth levers, the path to success won’t necessarily be smooth. New streaming services from Walt Disney Co. DIS, +1.70%, Apple Inc. AAPL, +1.10%, and others could help boost the revenue that Roku collects from customers subscribing to such offerings through its platform, but viewership of these services might cause people to spend less time viewing Roku’s ad-supported content, “potentially causing a deceleration of advertising revenue growth.”

He expects the company to keep spending on content, features, and ad technology, investments that are “driving profitability down substantially in 2019.”

He rates the stock at neutral with a $105 price target.

Read: Square gives a rosier revenue forecast after Caviar sale, but earnings outlook is light

Needham’s Laura Martin saw positive signs in usage metrics ahead of the upcoming launches.

“Engagement grew two times faster (i.e., hours spent viewing rose 68% year over year) than new users (up 34% year over year), suggesting Roku’s perceived value is rising to consumers,” she wrote. “New SVOD [streaming video on demand] services from Disney and Apple should accelerate hours viewed.”

For one Roku skeptic, the report was validation of a bearish stance on the stock.

“We are not surprised by the (-15%) decline indication in the stock in the aftermarket as an undeniably rich 12-plus-times 2020 revenue multiple simply does not leave a lot of room for anything but material beats,” he wrote in a note to clients late Wednesday. “Besides a short-term choppy outlook, we think the market is frankly naively ignoring what we believe will be significant additional competition emerging in 2020 as today’s PayTV distributors lever their dominant last-mile position to claw back their direct-to-consumer aggregator position from Roku/Amazon AMZN, +0.23% /Google GOOGL, +2.18% GOOG, +2.21%  /Facebook FB, +0.42%. ”

He has a sell rating and $60 target price on the stock.

See also: Expedia gets a pair of downgrades after earnings

One analyst cut his price target on the stock after the report, while two others raised theirs, according to FactSet. Of the 18 analysts tracked by FactSet who cover the stock, 13 have buy ratings, three have hold ratings, and two have sell ratings. The average price target listed is $137.29, about 16% above recent levels.

Roku shares have gained 300% so far this year, while the S&P 500 SPX, +0.58%  has added 23%.