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Roku's 200% surge this year has made the stock too expensive, analyst says

Key Points
  • Roku's tripling in value this year has given the streaming company a market value of about $11 billion.
  • Kyle Evans of Stephens wrote on Tuesday that the stock is likely to trade at a lower multiple relative to gross profit going forward.
  • The stock fell 7.3% after the report.
Anthony Wood, founder and chief executive officer of Roku Inc.
David Paul Morris | Bloomberg | Getty Images

Roku has tripled in value this year, outperforming almost every notable technology stock, and Kyle Evans of investment bank Stephens says the rally has finally gone too far.

Evans downgraded his rating on Roku to "equalweight" from "overweight," citing too much near-term risk to the stock after the run-up that pushed the streaming video company to a market cap of about $11 billion. The analyst pointed to last year's third-quarter results and Roku's slight miss in platform revenue, which sent the stock down 22%.

The shares dropped 7.3 to $88.83 on Tuesday.

Source: CNBC

Roku has benefited from the rapid transition from traditional pay television to over-the-top content and the increasing number of cable channels that have launched their own subscription offerings to try and keep pace with Netflix and Amazon. Roku sells its own streaming devices with thousands of channels and also provides an operating system for smart TVs, and the company generates revenue when users sign up for subscriptions from its service as well as from advertisers on the platform.

Revenue at Roku jumped 51% in the latest quarter to over $206 million, accelerating from 36% a year earlier.

"Although we remain very positive on Roku" over the long term in the smart TV market, "we believe the recent run and higher valuation" along with increased expectations creates too much risk to the stock price, Evans wrote. His price target of $84 assumes it will trade at 16.2 times 2020 estimated gross profit, down from a multiple of 18.5 at the time of his report.

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