- Morgan Stanley analyst Benjamin Swinburne said that in light of Roku's 400% gain this year, the stock's risk/reward profile is skewed to the downside.
- Swinburne added that Roku's valuation has surpassed not only most digital media competitors, but also high-growth SAAS companies with larger margins.
- Watch Roku trade live on Markets Insider.
Roku's monster year in the stock market is spooking one Wall Street analyst.
Morgan Stanley's Benjamin Swinburne downgraded the streaming company's stock from "equal-weight" to "underweight" on Monday. The news sent shares of Roku plummeting as much as 16%.
Swinburne said the stock's risk/reward profile in skewed to the downside amid its 400% rise in price this year.
According to Swinburne, Roku's valuation has blown past not only other digital media competitors, but also high-growth software-as-a-service companies with healthier margins.
The chart below demonstrates how Roku's margins are structurally lower than a typical SaaS company.
"We think it will be increasingly difficult to sustain the current premium," a team led by Swinburne wrote in a note Monday.
As Roku's growth slows and margins slide, the stock's high valuation could be challenged, the analysts added.
But, Morgan Stanley is still bullish on Roku's growth prospects. The firm boosted its price target to $110, up from $100 alongside the downgrade. That figure represents almost 21% downside from Roku's share price Monday.
The price target reflects a 16-times multiple applied to Roku's expected consolidated gross profits in 2021, compared to the roughly 30-times multiple the stock currently trades at.
Shares of Roku are up more than 355% year-to-date.