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Roku stock racks up Wall Street downgrades as profitability comes into focus

Yahoo Finance's Allie Canal joins the Live show to discuss a KeyBanc analyst's decision to downgrade Roku shares.

Video transcript

JULIE HYMAN: Turning to another stock that we are watching closely, Roku battling yet another downgrade on Wall Street, although the stock is bouncing 1 and 1/2%. KeyBanc, though, is lowering the company to sector weight, citing its lack of profitability in the connected TV streaming market. Yahoo Finance's Alexandra Canal joins us now to share the details. I mean, the stock has gone down a lot already, even though it's seen that little pop today.

ALEXANDRA CANAL: Been down a lot already, and in the pre-market trading, on the heels of that downgrade, it was down as much as 4%. Interesting to see somewhat of a recovery today, but that KeyBanc analyst Justin Patterson, he had been a longtime bull on this company. But he downgraded shares, citing that consensus estimates for 2023 and 2024 appear too optimistic. He noted that his previous bullish expectations for the company, like outsized growth and connected TV advertising, as well as Roku becoming a critical partner for a lot of those media giants, that ultimately, that didn't materialize.

In fact, he said that Roku seems to have lost market share, in addition to increasing its debt in ad tech. And if you want to solve all these problems, you need to heavily invest. And that's going to pressure those growth targets that have been set for gross margins, revenue, and profitability.

And he really isn't alone in this thinking. A lot of other analysts on the Street downgrading the stock over the past month. Five firms in total, including KeyBanc. 12-month consensus price targets average roughly $59 a share. And you were just seeing on your screen, according to data from Bloomberg analysts' recommendations, 13 buys, 12 holds, and 6 sells. So a lot of uncertainty that Roku has warned about, but investors still don't want to hear it.

BRIAN SOZZI: And it sounds like a lot of uncertainty within the ranks at Roku. They're now laying people off.

ALEXANDRA CANAL: Yep, 200 employees have been laid off, according to the company. And this is something that Patterson did address in his note. Will this stop the bleeding? The short answer is no. He argued that despite that headcount reduction, Roku will not be able to meaningfully pull back investments in other areas like North America, international TVs, content, and adtech, because that will ultimately slow the revenue recovery story. So layoffs still not enough to achieve that 2024 EBITDA profitability target. And that's sort of been the name of the game this year on Wall Street. If you're not maintaining those profits, you're going to get punished.

BRAD SMITH: Can we talk some originals as well here, Allie?

ALEXANDRA CANAL: Yes.

BRAD SMITH: I mean, Roku is also entering the streaming originals game with "Weird, The Al Yankovic Story." What are the pros and the cons for them there?

JULIE HYMAN: And PS, I thought Hulu did that. I didn't realize it was a Roku movie.

ALEXANDRA CANAL: Yes, it was a Roku original. This movie came out November 4. Roku didn't release the exact figures, but did say that millions of users tuned in to watch the film during its first weekend. It went on to secure the largest opening weekend audience, propelled a ton of engagement on the site. And that's what you're seeing tech companies like Amazon, they really want to create a very sticky platform.

And this is one strategy that Roku could have, although I must say that content production, original programming, it's a loser's game. We have seen that with Netflix, Disney really struggling with streaming profitability. And I think that Roku has a lot of other issues going on right now, in addition to this shaky macro environment, that perhaps this might not be the right timing for them to invest in originals. But again, there are the positives that it does create buzz. It does drive new users. And it creates that stickiness that a lot of these companies want.

JULIE HYMAN: I really want to see that movie.

BRIAN SOZZI: Yeah, another one from my holiday list.

ALEXANDRA CANAL: Great reviews. Great reviews.

JULIE HYMAN: It's supposed to be really good. Yes, it's like a biopic while also spoofing biopic.

ALEXANDRA CANAL: And Daniel Radcliffe, there's an A-list cast. I mean, the expectations were already high, and it seems to have delivered.

BRIAN SOZZI: Win-win-win. Allie Canal, thanks so much. Appreciate it.