Jefferies cuts Roku and Spotify, prefers defensive media names

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By Senad Karaahmetovic 

Jefferies analysts made a number of rating changes in the broker's research coverage of the U.S. media and entertainment sector.

They urged clients to focus on safety and names that have downside de-risked, highlighting stocks like Electronic Arts (NASDAQ:EA), Take-Two Interactive Software (NASDAQ:TTWO), and Netflix (NASDAQ:NFLX), which he upgraded to Buy.

"Each have their own near-term pressure points (we are generally lower than our peers for 1H23), but each have specific catalysts for 2H23 and 2024 where our estimates are generally above Street," the analysts wrote in a note.

On the other hand, the analysts downgraded Roku (NASDAQ:ROKU) and Unity Software (NYSE:U) to Underperform from Hold, while also cutting Spotify (NYSE:SPOT), and Funko (NASDAQ:FNKO) to Hold from Buy.

On Roku, the analysts commented:

"We do not believe that a significantly slower digital ad market is reflected in NT consensus expectations and the LT trajectory of the business remains unclear. We expect Netflix and Disney+ to capture majority of the incremental CTV ad spend in 2023 & 2024."

As far as Spotify is concerned, the analysts added:

"Our long-term Buy thesis was audio service convergence (music + podcast + audiobooks + fandom) will happen leading to better margins. It appears convergence is happening, but much slower than expected. We don't see gross margins returning to 2021 levels until 2024 and above 30% well beyond that (which was the original premise). Until we see signs of a re-acceleration, we'll move to the sidelines."

Roku and Spotify shares are down 1.9% and 0.9%, respectively, in pre-market Thursday.