On Friday, Morgan Stanley (NYSE:MS) reaffirmed its Underweight rating on shares of Roku Inc. (NASDAQ:ROKU) with a steady price target of $65.00. The firm's analysis highlighted that Roku's platform segment gross profit growth outperformed expectations in the fourth quarter, while the guidance for the first quarter was slightly lower than anticipated. Despite Roku's revenue growth maintaining a double-digit pace, the prospect for significant free cash flow or earnings is not yet visible on the horizon.
"The CTV market remains highly competitive with Prime Video as a new entrant in '24. Roku's top line growth remains double digits, but meaningful FCF or earnings remains in the distance," said Morgan Stanley analysts.
The company, after a year centered on cost reduction and restructuring, has shifted its focus to ramping up revenue growth. Subscription streaming services, which saw a rise in prices, were the primary drivers of revenue in the fourth quarter and throughout 2023. However, this indicates that advertising revenue growth did not keep pace. Roku's estimated high single-digit ad revenue growth for the year falls short when compared to the broader connected TV (CTV) industry's estimated growth rate of 17%, suggesting that Roku may have lost some market share in an increasingly competitive environment.
Morgan Stanley's commentary points out that for Roku to accelerate its advertising revenue, it will need to improve the sell-out rates on the Roku Channel. The industry as a whole has experienced a lag in monetization relative to viewer engagement. The firm is closely monitoring the impact that Prime Video's new entry into the CTV market in 2024 might have on Roku, particularly whether it could exert downward pressure on Roku's sell-out rates or cost per mille (CPMs).
InvestingPro Insights
Amid Morgan Stanley's cautious stance on Roku Inc. (NASDAQ:ROKU), insights from InvestingPro shed additional light on the company's financial health and market position. Roku holds more cash than debt on its balance sheet, which could provide a cushion in the competitive streaming landscape. However, it is important to note that net income is expected to drop this year, and analysts do not anticipate the company will be profitable within this timeframe.
InvestingPro Data reveals that Roku's liquid assets exceed its short-term obligations, suggesting the company has the liquidity to manage its immediate financial needs. Despite the lack of profitability over the last twelve months, Roku has experienced a high return over the last decade, reflecting its growth trajectory in the streaming industry. Nevertheless, the company is trading at a high Price / Book multiple, which may raise questions about its valuation relative to its tangible assets.
While Roku does not pay a dividend to shareholders, focusing on potential long-term gains, these InvestingPro Tips could be crucial for investors weighing the company's prospects against industry challenges. For more detailed analysis and additional tips on Roku, investors can visit InvestingPro, where 7 more tips are available to help make informed decisions. To access these insights, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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