People pass by a video sign display with the logo for Roku, a Fox-backed video streaming firm, that held it’s IPO at the Nasdaq Marketsite in New York, September 28, 2017.
Brendan McDermid | Reuters
Three times in the past nine trading days, Roku has dropped more than 10% for reasons having nothing to do with what’s happening inside the company.
That sounds disastrous until you consider that the stock is still up over 250% this year, topping the best-performing member of the S&P 500 (Chipotle) by almost 160 percentage points.
In an era of cord cutting and over-the-top everything, Roku is at the center of the action, providing the market-leading video streaming device and an operating system for smart TVs all while developing an advertising model so that the business isn’t reliant on hardware sales.
Roku’s performance as a public stock has set it apart from other companies viewed as niche hardware plays, like Fitbit, GoPro and Sonos. Those three companies are worth a combined $3.4 billion, about one-fourth of Roku’s current value.
That’s the bullish Roku story. But the bears are ready to pounce at any hint of increased competition, and there’s more of that every day.
Roku plunged 14% on Wednesday, after Comcast said it would give a free Xfinity Flex streaming box to internet-only subscribers and Facebook announced Portal TV, which includes the ability to stream Amazon Prime Video, Showtime and other apps. And last week, when Apple said that its Apple TV+ subscription service will be free for a year for customers who buy a Mac, iPhone or Apple TV, Roku plummetted more than 10%.
Don’t look to Wall Street analysts for any sort of consensus. Their price targets on the stock had ranged from $80 to $185 until Friday, when Pivotal Research’s Jeffrey Wlodarczak recommended selling the stock with a $60 target.
Wlodarczak said there’s “dramatically more competition emerging” and cautions investors that “the players that actually control the dominant data pipe into the households in the U.S.” are jumping into the game. Comcast is part of that group.
The stock had its worst day of the year on Friday, plummeting 19% to $108.05 at the close.
Earlier in the week, Guggenheim analyst Michael Morris raised his price target this week to $170 from $119. His optimism is not based on what’s happening in the U.S., which Roku says accounts for the “vast majority” of revenue, but on the potential for growth in various international markets. Roku took a big step in that direction on Sept. 7, announcing that Chinese manufacturer Hisense will become the first company to sell Roku-powered TVs in Europe later this year.
Hisense is the fourth-largest TV maker in the world and already sells Roku TVs in North America. Ten other manufacturers, including TCL, Sharp and Philips, partner with Roku in the U.S., and Morris sees more global deals on the way. That all works to Roku’s benefit when content providers like Disney are considering where they want to go for their upcoming direct-to-consumer streaming offerings.
Looking for global partners
“Roku is now in the early stage of expanding its international presence, which we believe represents significant incremental value creation opportunity for the company and shareholders,” Morris wrote. “We anticipate that the rate of growth in streaming video service penetration globally will outpace growth in the U.S. over the next 5-10 years, with all markets benefiting from robust, effective streaming connectivity and content interfaces.”
The most pessimistic analyst on the Street had been Alan Gould of Loop Capital Markets. He has a sell rating and an $80 price target, a level the stock hasn’t seen since May. That’s actually a rosy estimate for Gould, who raised his target in August from $45, after Roku reported 59% revenue growth and boosted its guidance, leading to a more than 20% stock pop.
Gould simply thinks the shares are overvalued versus comparable stocks. The stock currently trades at about 17 times revenue, more than double Netflix’s price-to-sales ratio, and also much higher than some of the most profitable companies in tech like Alphabet and Facebook. Apple is way down at 3.9 times revenue.
With such a sky-high premium, it doesn’t take much for investors to bail. Beyond just the valuation, the competition coming from mega-cap companies like Apple, Amazon and Google presents a lot of risk to Roku, Gould said.
“While ROKU has clearly taken an early lead, and its scale will clearly provide an advantage for the new DTC services to promote their services, we continue to believe the environment will become increasingly competitive, both on the hardware and advertising sides,” Gould wrote last month.
Gould is also concerned about the trade war with China and the potential for rising tariffs, given that Foxconn builds Roku’s devices. Roku highlighted the risk in its quarterly report, explaining that an increase in tariffs on its streaming players or on components could lead to delays, shortages and other supply problems that “could impair the retail distribution of our players and other products and ultimately our brand.”
A company spokesperson didn’t respond to requests for comment.
The fact that Roku’s stock has held up so well as the Trump administration has intensified its rhetoric about China reflects how far the company has evolved from the days when it relied on sales of little black boxes. In the latest quarter, two-thirds of its revenue and 96% of its gross profit came from the platform, which includes licensing partnerships with TV makers, ad sales and the sale of branded buttons to companies like Netflix, Amazon and Hulu, on its remote controls. When Roku went public in 2017, platform revenue accounted for just 41% of the total.
Roku’s ad model has been the biggest growth driver, as the company finds ways to take advantage of its expanding and engaged audience of 30.5 million active accounts. One source of advertising revenue comes from agreements with ad-supported content providers who let Roku sell a portion of their inventory. Roku also makes money through display ads, channel promotions and through ads on the company’s own Roku channel, which it launched in 2017.
EMarketer estimated in January that Roku’s ad revenue would jump 67% this year to $433 million and 46% in 2020 to $633 million.
Here’s where Roku has another big challenge. Netflix and YouTube account for more than half of all hours streamed on the platform. However, Netflix doesn’t run ads and YouTube contributes little by way of revenue because “we have no access to video ad inventory at this time, and we may not secure access in the future,” Roku said in its quarterly filing.
Roku badly needs those channels because that’s what people watch, but the money comes from elsewhere. That’s a hard balancing act for the company, and is yet another reason why the stock is all over the map.
Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.