Roku Inc ROKU reported fourth-quarter results Wednesday that were mostly ahead of expectations, but the stock’s valuation is “stretched” even after an initial 20-percent plunge, according to Morgan Stanley.

The Analyst

Morgan Stanley’s Benjamin Swinburne maintains an Underweight rating on Roku’s stock with a price target boosted from $30 to $32.

The Thesis

Roku’s earnings report showed that active account growth of 19.3 million was in-line with expectations of 19.2 million, while total streaming video hours of 4.3 billion were slightly short of the 4.4 billion expected, Swinburne said in a Thursday note.

The company’s reported platform revenues came in “well ahead” of expectations due to strong ad sales, the analyst said. Brand sponsorship and audience development spending also contributed to ad growth.

It is likely that daily hours streamed per average active account slowed to mid-single-digit growth in the quarter, Swinburne said. This may be attributed to an account mix shift toward Roku TVs, where engagement in over-the-top streaming is likely lower versus usage on player-driven accounts, he said.

Looking forward, Roku’s first-quarter revenue guidance fell short of expectations, but the full year revenue guidance of $660 to $690 million implies upside to Swinburne‘s estimate of $663 million. Roku is likely to reach a modest profit in 2019 as the company’s spending moderates, the analyst said.

Roku’s stock should be valued on a sum-of-the-parts basis due to multiple revenue outlooks and different margin profiles for each segment, Swinburne said. A revised $32 price target is based on a 1.5x 2019E player sales and 6x 2019E platform sales — both of which are multiples that are consistent with other online media platforms.

Price Action

Shares of Roku were trading lower by around 02 percent at $41.10 ahead of Thursday’s market open.