Higher valuation leaves 'less margin of error' for this streaming stock, Loop Capital says

Published Thu, Sep 7 20236:21 AM EDTUpdated Thu, Sep 7 202311:54 AM EDT

A higher valuation has raised the stakes for Roku and pushed Loop Capital to the sidelines. Analyst Alan Gould downgraded the streaming stock to hold from buy while keeping his price target at $85. Gould's target implies shares could slide 1.4% from Wednesday's close. "We believe there is less margin of error at the current valuation, particularly with a challenging environment for media and entertainment advertising as the streaming companies have shifted their focus to profits from growth," he told clients Wednesday. Gould previously named the stock a top pick for 2023. That optimism stemmed from positive trends for internet-connected TV, a low bar for results, excitement around the advertising outlook and an attractive valuation. Some of that has come to fruition. Roku has beat Wall Street expectations every time it has reported this year. Streaming's competitive position and the advertising market have both improved. Visibility remains limited, while the stock's valuation has increased from slightly more than one-time revenue to around three-times forward revenue. Roku announced Wednesday that it would lay off 10% of its workforce , which equates to about 350 people, in its third round of cuts over the past year. The company also raised its expectations for adjusted EBITDA and revenue in the third quarter. Gould said he "commended the cost controls" under new Chief Financial Officer Dan Jedda and thought they could set the company up to once again surpass analysts' expectations when reporting earnings next. But he said the latest cuts also indicate the potential for slowing revenue growth in 2024. Ultimately, he said the stock is trading at a valuation that leaves less of a cushion. But while the firm moved to the sidelines of the stock, he said long-term investors should still see Roku as a well-positioned leader in the network-connected TV space. Roku shares slipped 1.5% before the bell Thursday after climbing almost 3% in Wednesday's session. The stock is up more than 111% in 2023. ROKU YTD mountain Roku shares this year — CNBC's Michael Bloom contributed to this report.