• by Karlene Lukovitz  @KLmarketdaily, November 17, 2021

Roku’s stock was down nearly 9% in early trading this morning after MoffettNathanson senior analyst Michael Nathanson downgraded Roku shares from his previous neutral rating and cut the stock’s target price 20%, from $330 to $220.

Reflecting the acceleration of connected TV ad investment since the pandemic and TV networks’ push of combined linear/CTV ad buys, eMarketer recently projected that Roku will yield $1.58 billion in CTV ad revenue this year — behind only Hulu ($3.13 billion) and YouTube ($2.54 billion).

But Nathanson asserts that investors are not buying “what they think” when they buy Roku, noting that the company makes it difficult to distinguish its Roku Channel and third-party ad-sales revenue channels.

“In digging through the latest 10-Q, the signs of slowing revenue growth are even more obvious and have forced us to review our long-term assumptions,” he said, referring to his expectation that Roku will face increased competition from smart-TV makers, operating systems and streamers, and declining revenue from third-party subscription video-on-demand.

“Using a series of comparable data points and third-party research, it appears that Roku will need to monetize an absurdly high portion of long-tail AVOD impressions to come even close to Street numbers,” Nathanson explained.

For 2025, the analyst not only cut his projection for Roku revenue by 17%, to $17.5 billion; he slashed his overall video advertising projection by even more, citing expected industry consolidation and slowing of both subscription growth and ad revenues.

“We believe viewership, and ad spending, will consolidate among the leading streaming services,” he wrote. “As such, we are lowering our 2025 total video advertising estimate by 24%, reflecting slower anticipated ad growth from the long tail of third-party services on Roku.”

“Despite these lower expected revenues, we believe Roku will need to keep on investing in content and engineering resources to compete against other streaming services, smart TV OS providers and TV OEMs,” he added.