Investors should sell shares of Roku and perhaps even bet against them as the streaming company faces further downside with a recession ahead, Pivotal Research Group says. Analyst Jeffrey Wlodarczak downgraded shares of the company to a sell from a hold rating, saying in a note to clients Monday that despite a recent rally in shares the firm sees Roku as a “fundamental short” at current valuation levels. “Management ramped expenses dramatically into what we believe will be a ’23 recession which is likely to lead to lower than consensus revenue growth and larger losses through ’23 and possibly ’24 depending on the length of what we view as an inevitable recession,” Wlodarczak said. According to Wlodarczak, the impact of rising rates is likely to worsen before improving, with the worst of that effect expected to hit in the first half of next year. Against this backdrop, Roku’s recent investments in research and development and marketing could spell trouble for the company going forward as it faces a bout of challenging revenue growth. “This may be exacerbated by what we view as the fully penetrated nature of their core US/Canada market highlighted by continued weak US/Canada subscriber results at NFLX (SELL) which could also lead to weakness around lucrative streaming market spifs paid to Roku,” Wlodarczak wrote. Roku was paid big fees (spifs) from streaming platforms that were launching wanting to get people to use their service, but that trend is slowing. Going forward, Pivotal believes Roku will continue to see a decline in market share, especially as larger players get in on the crucial streaming aggregation market. Pivotal maintained its $60 price target on the stock, which implies a more than 27% downside from Friday’s close price. Shares of Roku have already plummeted 64% this year and sit 80% off their highs. Roku shares were off by 3% in the premarket. — CNBC’s Michael Bloom contributed reporting
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