Roku: Tilting Windmills Is Not Profitable
Roku's only real business is advertising.
The stock has enormous downside, and its upside is mostly speculative.
However, it will beat Q4 revenue guidance.
Roku's (NASDAQ:ROKU) main business is providing free content by licensing it and profiting from the advertising revenue it generates. Simply put, Roku wants to bring the traditional TV model to the internet, an interesting endeavor indeed.
It is a great business, but very overpriced right now. Advertising is the only reliable source of revenue for Roku, the player is just how it got its foot in the door but is nothing for the long term.
Why the player is not worth considering seriously
Roku's revenue comes from 2 sources: hardware and advertising. When evaluating the stock, the earnings from the hardware business should be tossed aside for the following reasons.
It has very low margins by design. While the Apple (NASDAQ:AAPL) TV, the Chromecast (NASDAQ:GOOG) (NASDAQ:GOOGL), and Amazon's Fire TV (NASDAQ:AMZN) have a higher profit margin, Roku prefers to cut its profit margin to reduce the price of the device. As stated in the Q3 letter, Roku player aims to increase the traffic of Roku platform, not to increase earnings.
The market is not that big. Smart TVs and gaming consoles (Xbox One (NASDAQ:MSFT), PS4 (NYSE:SNE) and Nintendo's Switch/WiiU (OTCPK:NTDOY) allow content streamed on the TV, and the remaining part of the market has to be split between the devices of Google, Amazon, Apple, and Roku.
The hardware business is a suicide mission.
Going against Google, Apple, and Amazon and surviving this far is quite an accomplishment. Roku has found the cracks in the sector and managed to make a niche for its devices. But tilting windmills is a dangerous endeavor, and rather than associating the success or failure of Roku as a company based on its hardware, I rather consider it as non-existent financially, as in the future, it might be too expensive for Roku to continue the fight or simply it might be more profitable to abandon this endeavor and instead put more time an effort partnering with more Smart TV producers to have its platform embedded in their TVs, as it recently did with Philips (PHIA).
The stock has enormous downside, and its upside is mostly speculative.
However, it will beat Q4 revenue guidance.
Roku's (NASDAQ:ROKU) main business is providing free content by licensing it and profiting from the advertising revenue it generates. Simply put, Roku wants to bring the traditional TV model to the internet, an interesting endeavor indeed.
It is a great business, but very overpriced right now. Advertising is the only reliable source of revenue for Roku, the player is just how it got its foot in the door but is nothing for the long term.
Why the player is not worth considering seriously
Roku's revenue comes from 2 sources: hardware and advertising. When evaluating the stock, the earnings from the hardware business should be tossed aside for the following reasons.
It has very low margins by design. While the Apple (NASDAQ:AAPL) TV, the Chromecast (NASDAQ:GOOG) (NASDAQ:GOOGL), and Amazon's Fire TV (NASDAQ:AMZN) have a higher profit margin, Roku prefers to cut its profit margin to reduce the price of the device. As stated in the Q3 letter, Roku player aims to increase the traffic of Roku platform, not to increase earnings.
The market is not that big. Smart TVs and gaming consoles (Xbox One (NASDAQ:MSFT), PS4 (NYSE:SNE) and Nintendo's Switch/WiiU (OTCPK:NTDOY) allow content streamed on the TV, and the remaining part of the market has to be split between the devices of Google, Amazon, Apple, and Roku.
The hardware business is a suicide mission.
Going against Google, Apple, and Amazon and surviving this far is quite an accomplishment. Roku has found the cracks in the sector and managed to make a niche for its devices. But tilting windmills is a dangerous endeavor, and rather than associating the success or failure of Roku as a company based on its hardware, I rather consider it as non-existent financially, as in the future, it might be too expensive for Roku to continue the fight or simply it might be more profitable to abandon this endeavor and instead put more time an effort partnering with more Smart TV producers to have its platform embedded in their TVs, as it recently did with Philips (PHIA).
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