Roku Inc. shares plunged a record 23.1% in Friday’s session following a downbeat earnings report, but were looking to take back at some of those losses Monday with a double-digit gain.
The stock ROKU, +9.94% was up 11.0% in Monday morning trading.
One positive view came Monday from Nicholas Grous, an associate portfolio manager at ARK Investment Management, which counts Roku as one of the largest holdings in its Ark Innovation ETF. ARKK, +2.84%
“Despite the disappointing quarter and weak guidance, we believe Roku’s long-term growth story remains intact, particularly because consumers continue to adopt CTV [connected TV] and abandon linear TV,” he wrote.
Grous added that his “outlook for Roku’s growth potential remains robust” given that the company is the leading streaming platform in the U.S., Canada, and Mexico. This positions Roku to “continue to lead the advertising shift from linear to digital TV,” he wrote.
Still, not all views were so rosy. Bank of America’s Ruplu Bhattacharya downgraded Roku’s stock by two notches midday Friday, lowering his rating to underperform from buy amid concerns about further pressure on the market for scatter ads.
Roku disclosed in its latest shareholder letter that marketers “significantly curtailed spend in the ad scatter market,” which represents TV ads bought during the quarter, and executives predicted that they could see continued challenges on this point going forward.
From Bhattacharya’s perspective, “the scatter market in 4Q could be worse than in 3Q, if macro worsens and given our view that more ad dollars are tied up in the television upfronts this year.” Such a dynamic could lead to additional estimate cuts for Roku, he wrote.
Bhattacharya added that while Roku has secured $1 billion in upfront commitments for the upcoming television cycle, “if macro worsens significantly, advertisers could resort to cancellation options.”
He sees various other factors that could impact Roku’s ability to monetize its platform. For one, a weakening economic environment could prompt users to scale back on the number of streaming services that they pay for each month, which could in turn pressure Roku’s content-distribution revenues. Further, the company may scale back its international growth aims in the short term as it looks to keep operating expenses and headcount expansion under control.
“The bulls will point to Roku’s larger scale and that valuation is back to pre-pandemic levels; however, we do not see an easy fix to the monetization problem in the near-term,” Bhattacharya said in his note to clients. He cut his price objective to $55 from $125.
The stock recently changed hands north of $72.