Roku: Actually, Declining Hardware Revenues Are A Problem

https://www.servicedonline.com/
Roku went public at $14/share and jumped almost 70% in its first day of trading.

The company currently provides the leading OTT (over-the-top) TV streaming player.

However, player revenues are declining due to increased competition from other mega-cap tech companies.

Roku touts the growth in its platform revenues, but without player sales, platform revenues will see meaningful deceleration as well.

Roku (NASDAQ: ROKU) broke the ice on technology IPOs last week, soaring more than 70% in its initial debut. The themes of cord-cutting and streaming television played well in investors’ ears, and at the time of writing, the company is worth $2.5 billion - approximately twice its debut valuation and 5x EV/FTM revenues.

Roku is a bit confusing to evaluate because of its dual revenue streams: it generates revenue from selling hardware players, as well as from a cut of streaming revenues from partners like Netflix (NASDAQ: NFLX). Streaming revenues are similar to software billings - they generate high, 80%+ gross margins, but they are still less than a third of Roku’s total revenue today. Hardware margins, on the other hand, are far less valuable - they carry an 18% gross margin - and they represent the majority of Roku’s business, and they are in decline.

For this reason, it’s nonsensical to apply a single EV/FTM revenue multiple on Roku’s entire revenue base like we can with most technology companies; the two revenue streams are vitally different and should be valued separately. When valuing the entire company as a single unit, 5x EV/FTM revenues doesn’t look expensive at all, but this simplified metric is blind to the underlying economics.

Roku doesn’t want you to look too much into the hardware component of its business. Roku’s offering documents and marketing materials play up the huge increase in platform revenue: +91% y/y. The company is right in asserting that this is the more important, more profitable, more recurring revenue stream. Hardware sales, after all, are one-time.

soursec:   https://seekingalpha.com/article/4111128-roku-actually-declining-hardware-revenues-problem

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