Roku's Core Business in a Weaker State than Anticipated - MoffettNathanson

© Reuters.

By Sam Boughedda

Roku (NASDAQ:ROKU) was downgraded to Underperform from Market Perform by a MoffettNathanson analyst on Wednesday.

The analyst, who reiterated a $62 price target on the stock, told investors in a note that the company's long-term estimates are below consensus and the stock "has surprisingly bounced back after an incredibly weak 3Q 2022 revenue guide."

"We see Roku's competitive position challenged from all sides with investment spending a necessity to remain competitive. We assumed that the very light 3Q 2022 revenue guidance was, in part, a function of ASC 606 accounting revisions," said the analyst. "However, after reviewing Roku's 10Q and disclosures around performance obligations, we believe that Roku's core non-RPO business is in an even weaker condition than we had anticipated. We also question the stability of Roku's video advertising gross margins given elevated content spending needed to compete against other streaming services."

The analyst added that there has not been a significant revision to the remaining performance obligation (RPO) balance from content distribution deals.

"The amount of revenues to be realized over the next 12 months from performance obligations is actually accelerating, in contrast to Roku's guidance for a sharp deceleration in total revenue growth next quarter. We estimate that performance obligations will account for 20% or more of Roku's total revenues next quarter. As such, Roku's core business outside of these content distribution deals appears to be in an even weaker state than we had anticipated," he continued.

Roku shares are up over 2% Wednesday but are down more than 65% in 2022.