Shares of Roku (ROKU) are under pressure on Wednesday after Universal Electronics (UEIC) announced that the U.S. International Trade Commission, or ITC, publicly issued a favorable final determination in UEI's patent infringement case against the company, concluding several Roku products infringe a UEI patent and barring the importation and sale of those products. Commenting on the news, Benchmark analyst Daniel Kurnos said his review of the ruling leads him to believe the financial impact to Roku may be more limited in scope than the headlines suggest.

PATENT FIGHT: Universal Electronics announced that the U.S. International Trade Commission publicly issued its favorable final determination in UEI's patent infringement case against Roku, concluding several Roku products infringe a UEI patent and barring the importation and sale of those products. The orders will become final on January 9, 2022, following the expiration of a presidential review period. The ITC's opinion "made clear" that Roku's products infringe six different claims of UEI's U.S. Patent No. 10,593,196 and rejected Roku's plea to avoid the ITC ban, according to UEI. Referring to UEI's evidence as "substantial," "impressive" and "dispositive", the commission issued a limited exclusion order precluding Roku from importing any infringing "televisions, set top boxes, remote control devices, streaming devices and soundbars," the company added in a press release announcing the ruling.

Benchmark analyst Daniel Kurnos said he expects Roku shares will trade lower on the news, but his review of the ruling leads him to believe the financial impact to Roku may be more limited in scope than the headlines suggest. The analyst thinks the ITC limited exclusion order and a cease-and-desist order to Roku applies to the Roku Ultra and Roku Soundbar and believes TVs and streaming sticks "do not appear to be at issue, despite the ominous headline".

Roku and UEI appear to agree that the newer iterations of both products do not infringe on patent ‘196, and thus Roku can continue to market these products, the analyst added. He believes ancillary product sales are largely immaterial, although the lack of support for the product, the theoretically worse performance of the newer iterations, and the "headline black eye" are likely to keep incremental pressure on shares. Kurnos maintained a Buy rating and a price target of $525 on Roku shares.

TARGET CUTS: Keeping an Overweight rating on Roku shares, JPMorgan analyst Cory Carpenter lowered the firm's price target this morning to $315 from $435. Heading into 2022, the analyst believes the internet group is in a stronger position than pre-pandemic amid increased digitization of the economy. However, he expects "more varied stock performance to continue," with company-specific operations a bigger factor into post-pandemic normalization. The analyst sees lower levels of growth as many companies face tough comps and move toward normalization. Into 2022, JPMorgan generally prefers e-commerce and subscription-based names over online advertising.

More bearish on the name, Morgan Stanley analyst Benjamin Swinburne lowered his price target on Roku to $190 from $295 and kept an Underweight rating on the shares. The analyst lowered his expectations for active account net additions in 2022 below consensus as he contends that pandemic pull forward and supply chain issues are likely to continue to weigh on active account growth. Although Swinburne acknowledged the risk/reward has become less skewed given recent underperformance of Roku shares, he still sees further risk to Platform segment gross margins.

PRICE ACTION: In Wednesday morning trading, shares of Roku have dropped almost 10% to $200.34.