Pivotal Initiates Roku With 'Sell' Rating, Cites Shift To 'Free Or Better' For OTT Market

Wall Street equities firm Pivotal this morning initiated coverage of OTT platform Roku with a "sell" rating and a target price less than half its recent trading price.

"Roku management deserves a lot of credit for what they have created and Roku is one of the few OTT investment pure-plays," Pivotal analyst Jeffrey Wlodarczak writes in a note sent to investors today, adding: "Roku management has frankly done a solid job of leveraging their cost-effective purpose built (for TV) OS and devices as a trojan horse into 31 million (mostly U.S.) households."

However, citing a variety of recent market developments -- especially increasing competition, such as this week's announcement by Comcast for a free alternative (Xfinity Flex) -- he concluded: "In our view Roku stock still looks dramatically overvalued despite the recent pullback and we are initiating with a 'sell' and a $60 target price."



More significantly, for the broader OTT industry, Wlodarczak projects that "the move to free (or better)" by Comcast likely will be copied by other distributors, putting pressure on hardware and subscription revenues, but raising prospects for subscription video-on-demand services offered through them, as well as advertising and "other" revenues that can be generated via free, ubiquitous distribution.

"If distributors all move to no/little upfront cost as part of a data offering we would expect these moves to force other players (mainly Amazon and possibly Roku) to move to a free or a nearly free product," he concludes, adding: "Unfortunately for Roku, their already high advertising splits (50/50) with OTT players also potentially sets them up to be undercut by competitors and distributor’s already massive content spend gives them enormous leverage."

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