Is The Roku Trade Done Or Just Getting Started?

Roku, the streaming hardware company that’s dazzled investors with a nearly 400% gain from the start of 2019 through Thanksgiving, saw its shares punished Monday with a drop of 15.2% after Morgan Stanley downgraded the stock from equal weight to underweight, saying there’s nothing more to the trade, and that “it’s all priced in.”

Morgan Stanley also raised its price target from $100 to $110, even though the stock was trading north of $160 prior to Monday’s selloff.

Investors are panicking following the downgrade, or have at least decided to take profits from one of this year’s best performing stocks, but are they right to be doing so?

After all, Morgan Stanley’s analysts haven’t revealed anything new about the stock. They acknowledged that the nearly 400% gains this year has priced in a lot of growth for Roku, and pointed out that if revenue growth were to shrink meaningfully in 2020 the multiple investors would be willing to pay for the stock would also shrink, and that would cause a sharp drop in the price.

They also reminded us that Roku not only beat guidance last quarter, but they are also expected to do so again for the fourth quarter. And Roku does seem to have a “sound strategy” for winning the streaming wars.

Morgan Stanley may feel that its time to collect the 400% in profits, but other analysts say Roku could triple revenues in the next three year, and increase profits more than 10 times in the following two years. That growth might be worth sticking around for.