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Even though Roku has performed impressively this year, Morgan Stanley has decided to downgrade the company’s stock rating.
American multinational investment bank and financial services company Morgan Stanley has changed its rating on stocks from Roku, the on-demand video streaming platform backed by Fox. Even though Roku has had an amazing year and climbed quite explosively in the stock market with 400% year-to-date YTD returns, Morgan Stanley dropped its Roku rating from equal weight to underweight.
In a recent note to the company’s investors titled “It’s All Priced In”, Morgan Stanley analyst Benjamin Swinburne, said that the impressive growth of Roku stock did not factor certain risks. According to Swinburne:
“Roku shares are up over 400% YTD due to rising estimates and overall exuberance over all things streaming. As a result, we see the risk/reward skewed to the downside. Roku’s valuation levels have surged past digital media players and even past high-growth SAAS (software as a service) companies…despite structurally lower gross margins.”
After news of Morgan Stanley’s Roku downgrade, the streaming company’s stock crashed more than 16% in response. Roku, which is one of the best-performing stocks in the market for 2019, joined all the S&P 500 best performers and began trading in red.
Away from Morgan Stanley’s downgrade, the major indexes including the Dow Jones Industrial Average (DIJA), the S&P 500, and the Nasdaq Composite Index, all tanked, losing 0.9%, 0.8% and 1.1% respectively, as manufacturing data came in very low. The fall was seen in the iShares Edge MSCI USA Momentum Factor ETF (MTUM) as well, as it also lost 1.3% on Monday as well. The MTUM which is one of the largest momentum-focused ETFs (Exchange Traded Fund) controlling assets worth over $9 billion, also includes rival multinational payment processing giants Mastercard and Visa, both of whom shed more than 2% of their respective weights.
This ETF which operates by quickly disposing bad performing stocks and buying winners as they follow market momentum has performed considerably well for the investors it caters to. Its recent decision to begin selling quite aggressively just might reflect not just the preferences of investors, but could also point to the end of the year, suggesting that these shares spiked a little too quickly and couldn’t maintain said momentum.
Another ETF to consider is the iShares Expanded Tech-Software (IGV) which climbed 7% in Q3 2019 and had pulled in 30%. However, on Monday alone, it also shed about 2.3% of its weight. IGV hosts stocks including Microsoft, Salesforce and Adobe, all of which also lost around 2% on the same day.
The Tribeca Trade Group CEO Christian Fromhertz explains that the market rush created the irregularity and some correction is definitely imminent.
“These things got pretty overbought. If you look at the chart of IGV, the software ETF, that’s basically run in a straight line higher. Same thing with biotech … When things move that way, you’re going to see some correction in those names”, said he.