Darth Roku actually does sound like a Sith Lord name, but I am actually replying on separate thread to Darth post here, so it doesn’t get lost in the shuffle:
It is a detailed and long post, so won’t just repost it all here, but here are some highlights:
"1) #1 by a mile in streaming hours. 43% and increasing of connected TV streaming hours and 22% across all mediums. Amazon was #2 at 18% and holding steady of share.
Most recent data I can find (April 2018), 83% of all US OTT Programmatic Ads were delivered on ROKU platform.
Roku dominates and is pulling away with US device sales. US accounts for 85% of OTT global OTT market. US accounts for 70% of global streaming hours. The international market is very much undeveloped, and to immature to have a leader yet.
CTV ad inventory on ROKU platform “more than doubled”, again. The company says they are in early innings and building out the full market is at least a three year event to truly mature.
Revenue growth has accelerated every quarter for at least the last year from mid 30’s to 59% most recently. The amount the company beats it’s top of line guidance has been accelerating, most recently $25M over managements top line guidance. A $25M beat this next quarter yields further acceleration to 62%.
Q3&4 are seasonally the strongest quarters which gives me high hopes for the rest of the year of upside surprises.
CTV ad delivery averages a 47% failure rate due to technical decencies along the supply chain resulting in missed revenue opportunities. Not sure if ROKU has the same failure rate or not but there is significant room for improvement in revenues without the already more than doubling of inventory. These issues will get solved by the industry sooner rather than later.
Far from the walled Garden image, Roku is an open source developer platform with a several year mature Unified Ad Framework. This framework connects Ad inventory fro ROKU supply and ROKU publishers supply and over 40 DSP including “major players” like The Trade Desk."
Ok…I am not in Roku for a few reasons:
- bad timing…everytime I thought about it, I liked something else better, and the price about tripled this year already, and I don’t want to chase a high valuation.
- my TTD bromance makes me biased against Roku a bit, as they act like (yet another) walled garden, from what I have read. TTD CEO Green was basically hinting about Roku when they stated their newly announced Amazon Prime Video partnership would likely pressure other “content aggregators” (I think that was his term) to follow suit.
- I have trouble understanding their revenue streams, because it isn’t broken out with revenue for each segment, and I completely discount the hardware, so am only looking at ad rev/sub fee cuts/software-O/S revenue. Also - what of this is recurring?
- I have Roku on 4 tvs at home…2 devices and 2 tv’s with O/S embedded. My “main” tv is a Sony with their own O/S (I believe google-based) and main reason I got the Roku’s was because they had a beta app for Xfinity Comcast, which allowed me to reduce the # of cable boxes in my home to (1). So I get the Roku and use it almost every night as I am banished to the basement tv so as not to wake the kids or mother of my children.
Bottom-line is that my #1 comment is the main thing. Woulda, coulda, shoulda, and if I had a time machine, I would have invested in Roku earlier this year.
As to my #4 comment, I have reached some admittedly biased and non-scientific conclusions, based on my own usage of Roku; I do not find any value in the Roku Channel…mostly older movies and shows, and I am not a huge re-watcher of things I have seen. I do not pay attention to the branded buttons on the Roku remote…the app is easy to navigate and it takes about 2-3 clicks max to get where I want to go. I do not pay attention to any of the home page ads…probably this is 2 decades of conditioning to avoid banner ads on laptop computers. I have had mostly crappy ad experiences…I tend to get the same ad over and over again…it just doesn’t seem intelligent. I don’t know if that is the fault of Roku, or the app I am using. I tend to use Netflix (no ads), Prime (no ads), Hulu (ads), and YouTube (ads). I already belonged to all those apps except Hulu, and when I got my Roku, I just signed in (so Roku couldn’t have gotten any money from me) to Netflix Prime and Youtube. I just maybe Roku gets a cut of my monthly Hulu? Would they get a cut of my eventual Disney+ membership? What if I just sign up to Disney+ on my Sony tv and later sign in to the app on Roku…pretty sure Roku is out of luck there, right?
So it is really confusing how to correlate the viewing hours and the number of subscribers to revenue. They probably have a per-user/ARPU type of metric, I assume.
Unlike Netflix, which has a formula you can figure by multiplying their sub fees X number of subscribers, I am not sure if this is as clean for Roku or not…I really just don’t know.
Bottom-line, if the stock lost half it’s value or tripled from here, neither would surprise me. Because I can’t get personally convicted in the valuation, I am choosing to stay on the sidelines for now. Doesn’t mean it isn’t a good investment…it just means I am not smart enough to figure out if it is or isn’t, at current valuation.
And given the recent SaaSquake in multiple compression we just witnessed across so many growth stocks, I do not expect to see multiples shoot right back up to levels of 30 P/S multiples being handed out like candy to anything that looks like a cool SaaS or growth company.
So if I back out the hardware…hold on. In looking up the hardware/software split, I see this recent SA article: https://seekingalpha.com/article/4290733-roku-priced-near-pe…
Mentions good things on ARPU:
Looking at ARPU, we can see that it’s growing over 4% sequentially the past five quarters, up from $16.60 in Q2 2018, to $21.06 in the most recent quarter. This figure is up 88% since the company went public a little over two years ago. On active users, the company’s net adds last quarter were roughly in line with the prior trend, at 2.1 million last quarter vs. an average quarterly net add of 2.08 over the past four quarters. This remains impressive as maintaining the same growth is always challenging as scale increases.
Thought on valuation:
Moving over to valuation, we can see that Roku is currently trading at a price to sales ratio of 19.60, and anything above 15 is quite lofty. Comparing this to Netflix (NFLX), the highest price to sales ratio Netflix traded at in the last decade was 13.91 times. Roku’s current price to sales ratio of 19.60 is 42% above Netflix’s peak levels.
The good revenue (not hardware):
Platform revenue of $167.7 million, up 86% YoY
Platform revenue growth of 86% year-over-year increased sequentially from 79% year-over-year last quarter. We expect platform revenue to represent roughly two-thirds of total revenue.
For modeling purposes, you should continue to model full-year platform gross margins in the low 60s as a percentage of revenue.
So if their full year total rev goal is approx $1b, and 2/3rds will be platform, then that is $667m or so in “good” revenue.
Ok…I admit that non-hardware story is better than I thought it was.
$667m would be about the number they announce in Feb 2020, in their Q4 and full year ER…about 5 months away.
For comparison, TTD latest full year forecast, which would end about same time as Roku, is $653m.
TTD is a $9.5b mkt cap, and at $653m they are a forward-looking 14 P/S.
Roku, is a $17b mkt cap, and just on Platform rev of $667 their forward-looking P/S is 25.
TTD we can likely expect will be mid-40s growth next 2 Q’s.
Roku is likely a bit more volatile due to when they recognize revenue, but this past ER hints that the coming ER may show growth in current Q of “only” the 40’s, down from 50’s growth this past Q.
Conclusion: I get streaming and CTV. I like the concept. I struggle with how they get paid and how much of their platform rev is ad rev vs subscription fee cuts, etc…
I also see their platform business (only part I care about long-term) as being equal in size, and potentially equal in growth rate, as TTD, which is currently much smaller in mkt cap. So if the stock came down in price, I would be a buyer…but I fully expect it may never come back to a place where I feel like pulling the trigger.