Morgan Stanley Slaps Roku With Downgrade After Massive Rally

If you're like a lot of people out there, chances are you spent at least some part of the preceding holiday weekend streaming some video. It's also a pretty fair bet that some of you put a Roku NASDAQ: ROKU device to work for that streaming. It's been a great year for Roku by pretty much every measure, but a new report notes that Morgan Stanley NYSE: MS has downgraded Roku stock for one surprising reason.

Roku a Sputtering Streamer Stock?

By most indications, things have been going great for Roku. Roku shares are up 400% over last year's figures, amid a combination of quality products and a general enthusiasm for streaming video in general. The notion that people could indeed “cut the cable” and replace it with online-only video becomes more and more viable with each passing day, and Roku is at least near the tip of the spear on this one. It was good enough for us to include it in our list of seven technology stocks that would lead the sector in 2019, and sure enough, lead it did.

In fact, even Morgan Stanley, who issued the downgrade from “equal weight” to “underweight”, adjusted its price target to $110 a share, up from its original estimate of $100. Given that as of this writing, Roku stock is trading at 138.39—and this down from the previous close of 160.37—it means that Morgan Stanley is expecting one doozy of a drop, and already getting one.

Everything Good Has Already Happened for Roku

Basically, in issuing this valuation, Morgan Stanley has identified one critical point about stocks: they do not go up forever. Indeed, with a 400% gain since this time last year under its belt, Roku has made massive strides, the kind that just isn't sustainable. That led Benjamin Swinburne, an analyst with Morgan Stanley, to note that “it's all priced in” when referring to good news about Roku.

Morgan Stanley made it clear, though, that Roku has been a success; the business has been on an upward trend and gross margins have been doing well. Reports note that its platform sales are nearly three times what Netflix's NASDAQ: NFLX are, and are almost double that of high-growth SaaS firms. The problem is actually keeping that level of growth going, especially in a market with tons of competitors.

Being Just Another Face in the Streaming Crowd

It's that competition that Morgan Stanley seems to ultimately believe will hurt Roku going forward. It not only looks for a negative impact on Roku's hardware operations but also to its digital advertising operations. There are plenty of ways to access streaming video out there and most of them have nothing to do with Roku, from streaming media platforms built directly into smart TVs to disc players (Blu-Ray, 4K or DVD) with streaming options included. Even game consoles will handle that function now, so the need to get a Roku box is a lot less urgent than what it once was.

It's also not hard to see that if Roku's hardware sales are hurt going forward, then so too will its advertising sales efforts take a comparable knock-on hurt. Advertising lives and dies by reach and impact, and it's next to impossible to have good impact numbers without first having good reach numbers. You can have a 100% engagement rate for an audience of 20, and that makes you vastly less valuable than an audience of two million with a 1% engagement rate.

It certainly doesn't help that Roku's presence in the media hasn't been exactly brisk lately. Roku's news sentiment was negative on InfoTrie's scale at one point, with headlines all overlooking for downturns ahead.

With huge gains in streaming provider numbers and streaming hardware options, Roku has legions of competitors. That's not a market where anyone can turn in back-to-back years of 400% gains, so it's a safe bet that 2020 for Roku will not look anything like 2019 did. While it's not likely Roku will go out of business, it is likely that Roku will take its place as one more face in the streaming crowd.