Roku (ROKU) Takes Another Beating as Wall Street Questions Valuation

After falling nearly 8% Thursday on a Morgan Stanley downgrade, streaming video provider Roku (NASDAQ: ROKU) is down another 8% on Friday after another analyst took an axe to the stock.

Citi analyst Mark May cut the stock to Sell from Neutral and set a $28 price target, or 45% below Thursday's closing price.

With shares up 266% from its IPO just three short months ago, May highlights that the valuation is stretched at 8.7x EV/18 Rev and 21x Gross Profit. This compares comps that trade at 5.2x Gross Profit and Netflix (NASDAQ: NFLX) at 18x.

May further notes that many of the company's comps are profitable, while the don't expect Roku reaching profitability until 2019.

He thinks the outsized performance of the stock could be related to the relatively small free float (18mn shares, but a 30-day ADV of 9.2mn shares), few ways for investors to play the OTT theme, and relatively high revenue and gross profit multiples for OTT comp Netflix (6x and 18x, resp.).

While May is positive on the long-term growth of the OTT video market in general and on Roku's growth outlook in particular, they view the current valuation as more than reflecting that outlook.

Catalysts for a potential decline in the stock price, according to May, include the IPO lockup expiration in March, earnings results that don't rise to bullish expectations, and/or increased competition from the likes of Google, Amazon and/or Apple.

StreetInsider Premium first published a variation of this article at 6:18AM ET. Try StreetInsider Premium for two weeks free here.

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