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Roku Stock: Could It Really Drop 25%?

Maven Flix on TheStreet logo Maven Flix on TheStreet 1/10/2022 Bruno Reis

This analyst believes Roku stock may fall even further than its disappointing performance in 2021. Here's why.

Over the past year, Roku  (ROKU) - Get Roku, Inc. Class A Report has been the worst performer in the video-streaming industry. Its stock has seen a plunge of nearly 200%, disappointing many investors.

But after months of consecutive declines, is now the time to buy shares in Roku on the downside? For an analyst at Atlantic Equities, the answer to that question is an emphatic "no."

This analyst projects that ROKU has room to fall even further and recommends selling. Let's dig in to understand why he's so bearish on Roku and what the market in general thinks about the stock's upside potential.

Figure 1: Roku's logo display. Roku © Provided by Maven Flix on TheStreet Figure 1: Roku's logo display. Roku

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The Atlantic Equities View

Hamilton Faber, Atlantic Equities co-founder and analyst, initiated coverage of ROKU with a bearish view. Even though the company is among the biggest streaming giants in the world, he expects its growth to slow by 2025.

His main argument involves the platform's penetration into U.S. homes. According to Faber, Roku will be present in 40% of homes by 2025. That's only a 7-percentage-point increase of the current estimate (33%).

In addition, one of the main problems Roku faces is stiff competition from television manufacturers that are creating their own systems to replace its platform.

What Wall Street Says

According to TipRanks, based on 20 analysts who cover ROKU, the company sports an average share price target of $350. That implies a massive upside potential — about 90%, as of last check. However, on average, the stock is rated a “moderate buy.”

The highest reported price target is $550, which implies potential gains of over 200%. The lowest ROKU price target on TipRanks is $136, which represents a downside of almost 25%.

Looking at these numbers and recommendations, we can see that there are analysts who are very optimistic about ROKU, projecting exponential growth for the company in the coming years. But there are also those who are more cautious and who do not believe that the company will be able to reach all of its market and appreciate in value at such extreme levels (such as tripling in value).

Multiples Analysis: Is ROKU Expensive?

Looking at the comparable companies in the segment, we can see that ROKU is trading at a higher multiple than all the others. Even Netflix, which got a big valuation in the year 2021, has fewer stretched multiples than Roku. Moreover, among these four stocks, ROKU has depreciated the most in 2021, accumulating a decline of more than 50%:

Figure 2: Streaming Company's P/S. Seeking Alpha © Provided by Maven Flix on TheStreet Figure 2: Streaming Company's P/S. Seeking Alpha

Thus, Roku's multiples are still too high for us to consider this company "cheap." To justify being marketed at the same price-to-sales (P/S) level as Netflix (the current leader in the streaming market), Roku would have to show comparable growth and have a reasonable chance of gaining significant market share

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)

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