Stock of the Week: ROKU, Inc.

This week’s stock of the week is roku, Inc. (ROKU). We previously wrote two news articles about Roku; Roku back to Growku? and Good news for Roku, upgrade time! We are going to take a more in-depth look into Roku and what their actual business plan is. There are many misconceptions about Roku’s primary business format and what their end-game is. In this article I will do my best to describe Roku’s business format as best as i can. If you have any more questions or suggestions about this article or if you have more information we could use, be sure to contact us through the contact page or mail us directly at info@aceofstock.com

What is Roku?

Anthony Wood founded Roku in 2002. Anthony was already proven a successful business man at this point in time, he was also the vice president of Netflix, Inc. (NFLX). Roku initially started out as a producer of streaming devices, their focus was mostly on selling the hardware. However in recent years their focus has shifted more to the advertising and content distribution side of the company. And this is where most of the confusion comes from by investors who didn’t do thorough research on Roku. A lot of people think Roku’s main business plan is selling their streaming devices and as of recent, speakers. More on this later.

A good start

Roku went public to the NASDAQ exchange on 28 September 2017. Since then Roku stock has increased (and decreased) in price dramatically. Roku has a relatively low float and can be extremely volatile when a good or bad news item comes out. On the day of its IPO Roku rose 67% from $15.78 at opening to $23.50 at close. A year later Roku nearly tripled in price to roughly $73. However at this point Roku started to drop, on December 17th, 2018 Roku reached a bottom of $27.28. This was nearly the same price as the closing price on the IPO day. But since this bottom, Roku has been climbing to new heights, reaching an all-time high of $176.55 in September 2019. Since it’s all-time high it’s been a roller coaster though. Drops in the double digits were not uncommon. However Roku has been recovering, it closed last Friday at $144.26, which was a 2.75% decrease for the day. The Price targets for Roku have been increased (and decreased) regularly.

Business model

As mentioned earlier, there are 2 main sides to Roku. They sell hardware (streaming devices and speaker), and they offer advertisements and distribute content for their content partners. It is important to understand that the main focus for Roku does now lay on the software side of the company, the selling and displaying of advertisements and licensing their software. In the most recent quarter the platform net revenue accounted for nearly 70% of their total net revenue. And the gross profit of the platform accounted for a whopping number of 95%. The profit margins for the platform are a lot higher than that of the players they sell. The platforms margin in the Q3 of 2019 was about 63% versus 7% of the players.

As you can see the most profitable side of Roku is indeed the platform, not as many people would believe the selling of their devices. In fact, the sales of the devices is a way to increase the number of users on their platform. As the amount of people using their platform is key to their business model. The Roku soundbars and speakers even have the Roku OS build in so you can turn your TV into a Roku TV just by plugging in their speaker.

Roku also licenses their software to TV manufacturers. They have deals with a bunch of brands such as Element, Hisense, Hitachi, Insignia, JVC, Philips, RCA, Sharp, and TCL. From these brands it’s very important to highlight TCL and Hisense. TCL is important because it currently holds the biggest market share of TV’s sold by units in the USA. It holds a share of around 26%, with Samsung coming in second with 22%. This is of course important because the more TCL TV’s are sold and used, the bigger the user-base of Roku becomes. Hisense is important because it’s part of Roku’s new international expansion. Hisense TV’s with Roku OS are being sold in the UK. Hopefully, Roku will expand their international business even further and make moves on the European market as well.

Another important thing to note is that Roku is NOT a content creator. Roku doesn’t create any content itself. They facilitate a stable and user-friendly streaming platform for other content creators. They allow content creators to distribute their content through Roku’s ever growing user base. So companies such as Netflix, Inc. (NFLX) , Amazon.com, Inc. (AMZN), The Walt Disney Company (DIS) and Hulu are NOT competitors of Roku. In fact they boost business for Roku rather than take away from it.

OTT is a growing sector

Roku’s potential lies mostly within the Over-the-top sector (OTT), since Roku is a streaming platform that takes people away from regular linear television. The streaming market has been growing at a rapid rate and people are “cutting the cord” more than ever. Cutting the cord in this case means that they are cancelling their television subscriptions and moving into streaming their shows, movies and other things. This trend in the market has some massive advantages for business like Roku and for the consumers themselves.

From the consumer’s viewpoint: You can watch the show, movie or any content you want at any point in time. You’re not limited to the schedule’s of the broadcasting companies. Also, you can login to your account anywhere and watch at any place at any time you want. Another advantage is that you either get no advertisements at all (for paid services) or you get a small amount of short advertisements that also happen to be targeted to you. As opposed to the longer advertisements and commercials targeted for a general audience that you get while watching linear television.

For business like Roku this means that there is an ever increasing target audience on which you can profit in several ways. You can profit by simply taking a cut of the subscriptions that people have on paid services. And you can profit from the advertisements that people get to see. Another advantage for both the advertiser and business like Roku, is that the advertisements can be targeted. Since streaming is done through the internet, the advertisements can be targeted to each individual, making the ads that much more relevant and valuable. This means that businesses like Roku get paid more for each advertisement that gets watched or clicked on, since they’re targeted specifically to the consumer rather than a broader audience.

The OTT sector is growing rapidly and provides massive opportunities for companies such as Roku. According to this research conducted by “Allied Analytics LLP”, the OTT market in 2017 was valued at $97.43 billion. The more interesting number is that they claim that the OTT market will be valued at $332.52 billion in 2025. This is not a small increase. And considering that Roku has an (increasingly) big market share in Televisions by the unit in the USA already, this is great information for the future of Roku. Even if they won’t grow their market share and if they wouldn’t expand any further, the growth of the OTT market alone would already mean significant increases in revenue and profits for Roku.

No profits and Dataxu acquisition

A recurring complaint about Roku stock is that they haven’t made a profit yet. When this argument is made, people usually refer to the fact that Roku was founded in 2002 and still hasn’t made a profit yet. You have to take into consideration that Roku only went public and started to really grow in 2017. Roku can be described as a growth company. Much like Amazon.com, Inc. (AMZN) who didn’t have any profits for several years when they first went public. These companies invest most if not all of their profits back into the company in order to grow and advance further. Roku does the same, they invest their profits back into the company to advance the company even further. As such their last conference call had one “negative” note which the bearish people loved to quote. Roku lowered their guidance by $5 million. Why did they do this? Because they’re writing off the costs of acquiring Dataxu, which cost them around $5 million. This is a perfect example why this is NOT a bad thing. See, Dataxu can help Roku to gain more revenue and more profit. Dataxu has systems and abilities to get your advertisements in a more efficient and more relevant way to the consumer. By acuquiring Dataxu, Roku can get their ads to the consumer in a better more streamlined and effective way, thus increasing the efficiency of the ads and as a result of that, get more revenue and profits from said ads. The $5 million they spent to acquire Dataxu will most likely pay itself back in no time.

The verdict for Stock of the Week: Roku

If you take everything in consideration then you can see that there is plenty of upside for Roku stock. Sure at the moment the price for Roku might be a bit on the high side for their current valuations. But if you look further ahead you will see that there is a lot of market growth and a lot of potential for Roku to gain control of this market and use it to the best of their ability. With the ever growing OTT market sector, and the acquisition of Dataxu combined with the growing market share in the USA, AND expansion to international markets, I could definitely see Roku stock going up alot more. If Roku can get into the foreign markets such as Europe and further into Asia, there can be a lot more revenue to be made. If we talk about Roku price targets, then there are some mixed feelings. Some analysts are extremely bearish and others are pretty bullish. Roku stock currently sits comfortably around the average price target of $146.75. With a low and high of respectively $60 and $200, there is a lot of room for Roku to go both up and down. Roku still holds a Buy rating and recommendation.

My personal opinion is that Roku is a buy for the long term. In the short term it’s too volatile and reacts to extremely to news to be a lucrative investment for the shorter term. However I think that in the longer term (read years), I think Roku could become a really big player in the market and it could rise a lot in the course of a few years.

Also check out our other Roku posts:
Roku back to growku
Good news for Roku, upgrade time!
Click here for the Stock of the Week

3 thoughts on “Stock of the Week: ROKU, Inc.

  • December 9, 2019 at 00:28
    Permalink

    good job…..nice write up…thx

    Reply
  • December 17, 2019 at 11:57
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    This is a thoughtful write-up. But to those who follow Roku, nothing new. A couple of small points that came to mind as I was reading. More than once you state growth companies (like Roku) invest their “Revenues” back into the business. Unless I am missing something, growth companies invest their “profits” back into the business. Revenues are gross of “cost of goods/services” provided. Revenues are also gross of selling and administrative costs. First revenues cover costs of goods and services provided and then selling and administrative costs. Excess of these costs (“profits”) are reinvested back into the business. So growth companies reinvest “profits” not revenues back into the business. Also in the sentence ” Roku still holds a good Buy rating and recommendation”. The word “good” is not a powerful word and is often over used. A Buy rating is already a positive, you can’t make it “gooder” (ha) by adding the word good. A Buy rating is already good, adding the word good is redundant and adds nothing.

    Reply
    • December 17, 2019 at 17:36
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      Thank you for the constructive feedback, i appreciate it!
      I’ve addressed the points you mentioned and fixed them.

      Reply

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