Roku: A Tale Of 2 Cities



Wall Street's honeymoon with Roku hit a road bump with a bad first quarter guide.

Near-term noise aside, Roku could more than double in value over the next several years.

Roku also could be eaten alive by competitors over the next several years.

Which thesis holds more weight?

Wall Street's honeymoon with Roku (ROKU) hit a road bump when the hyper-growth streaming player provider reported strong quarterly results alongside a weak guide. When you're a richly valued, newly public, hyper-growth company like ROKU, you need clean beat-and-raise quarters in order for the stock to head higher. So it's no wonder a low guide sent shares spiraling.

Many bulls think this is a buying opportunity, while many bears think this is the beginning of a secular decline and that ROKU will follow in the footsteps of one trick ponies before it like GoPro (GPRO) and Fitbit (FIT). We understand both of these arguments. In an everything-goes-right scenario, ROKU could more than double over the next several years. In an everything-goes-wrong scenario, ROKU could be eaten alive by far larger, far more resourceful competitors.

Consequently, we are neutral on the name, with a slightly bearish skew. At this point in time, buying ROKU stock feels more like a speculation than an investment.

ChartROKU data by YCharts
First, let's look at the bull thesis. ROKU makes and sells OTT streaming players that do for the streaming world what cable boxes do for the traditional TV world. That is, they allow you to actually watch the content. In this sense, ROKU is a pure-play on the OTT streaming transition. As more and more consumers cut the chord and go OTT, the more and more players ROKU will sell.

But that hardware business is quickly becoming a side show. ROKU is creating an ecosystem on top of its streaming players, and that's the exciting part of ROKU's business model. ROKU already has built out the software side of its business that GoPro and Fitbit have tried so desperately to do. ROKU's platform revenues, largely driven by a burgeoning advertising business, accounted for nearly half of all revenue last quarter and nearly doubled year-over-year. Moreover, those revenues have really high margins (roughly 75%) vs. 10% margins on the hardware business. Consequently, the more the software business ramps, the more the company's overall profitability rises.


soures: https://seekingalpha.com/article/4150323-roku-tale-2-cities

https://www.servicedonline.com/

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