Roku
Roku CEO Anthony Wood
- Roku plunged on Monday after Citi downgraded the stock from "neutral" to "sell."
- A triple-digit-percentage gain for the stock so far this year, rising competition in the streaming space, and what appear to be robust hiring plans at the company all contributed to Citi's downgrade.
- The note comes days after the news outlet Cheddar reported Amazon was looking to expand its streaming offerings.
- Watch Roku trade live.
A massive rally in Roku shares, an increasingly competitive streaming space, and what appears to be robust hiring plans fueled Citi's share-crushing downgrade of the stock on Monday.
Roku shares plunged as much as 8%, to a two-month low, after Citi analyst Mark May lowered his rating on the streaming-device company from "neutral" to "sell" and trimmed his price target from $53 to $50 a share.
"This is not necessarily a call on the Q1 earnings report," May said, referring to the company's yet-to-be-released quarterly report. "In fact, we acknowledge the general secular tailwinds in the OTT space and the potential risk from investors continuing to reward Roku with a premium multiple."
May cited a few factors behind his downgrade. First, Roku's stock had rallied nearly 110% through last Friday's closing price, causing its multiple to get a bit out of hand. While Roku is trading at 11 times enterprise value-gross profit, its competitors like Netflix, Twitter, Snap, and Facebook are trading just above 5 times. That ratio is just a fancy way of trying to assess what a stock is worth.
Additionally, an increasingly competitive over-the-top (OTT) landscape could be a challenge for Roku, Citi said. Among other brands, the firm cited Apple's foray into streaming.
Notably, Citi also said what look like big hiring plans at the company could be an issue. Roku currently has the highest ratio of job openings to its current headcount, at 15%, of the companies May covers. That figure is 11% at Twitter and 10% for Facebook.
Citi's recent hiring forecast data shows "Roku has the highest number of job openings relative to its headcount of all companies in our coverage," May wrote. That was consistent with Roku's guidance for a decline in earnings this year.
Eric Savitz, a spokesperson for Roku, declined to comment on Citi's hiring forecast to Markets Insider.
Monday's report comes days after Cheddar said Amazon was looking to expand its streaming offerings. Cheddar reported that Amazon - which declined comment to the news outlet - sought to "include more ad-supported streaming channels to compete with Roku and Pluto TV." The report weighed on Roku shares last Wednesday.
Read more: Roku drops after report says Amazon is turning up the heat on streaming
Citi's investor note wasn't the first "sell" rating the stock garnered in recent weeks.
In March, shares of Roku plunged 14% after an analyst at Loop Capital downgraded it from "hold" to "sell." And like Citi's May, Loop Capital cited the stock's multiple.
"We recognize that stocks can go from expensive to more expensive, but we can no longer justify a Hold rating on Roku at this price," said analyst Alan Gould. He called the stock's valuation "excessive."
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