ROKU Competitors’ Strategies

Investment Analysis Clubs Saul’s Investing Discussions
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I’d like to solicit a few more thoughts on the implications of Comcast’s move specifically. I feel like we’ve dismissed it a little too quickly. Comcast has 27 million subscribers for their internet service. While their cable subscriber numbers are falling, internet subscriber numbers continue to grow. Which makes sense, because people still need internet, and most don’t have very much choice in terms of a provider, and they will most likely stick with the company that’s been providing their cable all these years.

Roku has around 41 million users I think. There is probably a significant overlap between that and the 27 million Comcast internet users.

Now Comcast is offering their streaming box for free. I think conclusion number 1 is that this will steal SOME potential users from Roku. The question is - how many?

There are a number of factors that make the Comcast move not quite as dangerous as it seems at first:

1 - If you already have a smart TV, or plan to buy one, you most likely don’t need ANY kind of separate streaming box (extra clutter, cable, remotes). And there is a good chance the smart OS in your TV is already powered by Roku. This category will increasingly cover 100% of the population over time as non-smart TVs become a thing of the past.

2 - You may already have a streaming device that you like. It might be a Roku, or a Firestick. But you’ve already paid for it either way, so there is no reason for you to switch to Comcast’s.

3 - If you do not already have a smart TV or a streaming device everywhere in your house where you may like one, you might consider the Flex. You only get one per household for free (and no one in their sane mind will want to pay for $5 a month for another one) - but why not take the free one at least. I think most people would give a try at least. This is the category that will likely take at least -some- potential users from Roku.

The questions I am wrestling with are:

a. How big is category 3? and
b. What happens if Comcast goes further and offers more Flex devices for free?
c. Depending on answers to a) and b) is the current drop in Roku’s price a buying opportunity, or a fair drop?

Would love to hear some opinions on this.

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To be clear, it’s not that I think Roku’s competitors have a high likelihood of displacing them. Rather, I think Roku’s current revenue, at the rate of $21/user and rising, is too good to be true. And I think it’s plausible that other stakeholders (the TV makers that imbed Roku, Netflix and YouTube, etc) would want a piece. Do you have any thoughts on that? Does $21/user seem like a lot to anyone else or is it just me?

PaulWBryant

Sure other players want a piece, just as other players want a piece of the smart phone OS but what is it preventing Tizen and Microsoft from crushing Android? What prevented Google+ from crushing Facebook? What prevented Linux from crushing Windows? Linux was arguably “better” than Windows, to hear some people tell it. I could come out and give a direct answer but it would be valuable that people discover the answer to that for themselves because many of the things that apply to the Smart Phone OS wars, the computing platform wars and most platform wars in tech, really, will likely apply to the Smart TV platform wars.

Next, if any one thinks $21/user and rising for Roku is too good to be true, then people have not been doing a very deep study of the phenomena of cord cutting and how that is affecting the world of advertising. Once again, I can give direct answers but it is not my job to convince people. People should actually study the situation a bit more and not from the framework of how one’s own self tends to watch TV but more from the framework of what masses of people seem to be doing, advertisers seem to be doing, and content owners/distributors seem to be doing. I mean, geez, Roku is making $21/user before things like Disney+ has even got started…before things like the eventual shifting of live sports fully to Connected TV…I mean subscriber levels on things like DirecTV are dropping like a rock and eventually the audience on Connected TV will become more important than the audience on DirectTV and Comcast…then there will likely be a tsunami of live content like sports moving to Connected TV…that type of stuff has yet to even happen but we might be within 5 to 10 years away from it happening…where others see nothing, I see a long growth ramp. UFC, WWE, all types of alternative new sports, live streaming platform of gaming tournaments, interactive sports betting…the possibilities are endless and that is even before talking about big stuff like the NFL, MLB, NBA, NHL, Tennis, Golf, College Football and College Basketball shifting over with all the opportunities for ad targeting.

Almost as soon as I saw what Roku was I bought it because what Roku is…it is like buying a company that owns a potential android and if Roku does become one of the dominant platforms for Smart TV’s, all those that did not buy it will likely be kicking themselves for ever more for at least not buying a starter position and learning the company as they go along…but hey, everyone do what they want…it is not my job to convince anyone.

I never bought Roku when I first saw it because I thought it was only about sticks and boxes but then I started reading up on Roku and what Roku seems to be doing would not be all that dissimilar to what Google did with android and mobile search.

Starrob

If Apple, at the peak of its powers a few years ago, either couldn’t crack the code, or ran the numbers and realized it wasn’t worth it, decided to pass then that certainly highlights the challenges of either entering the TV OS partnership space with a hardware supplier, or going it alone and building the entire unit in house.

Brandon

Apple has one major problem and that seems to be in monetizing a TV OS…Apple abhors many forms of advertising and while Apple does do some advertising in various forms, it is not really Apple’s forte.

Starrob

Well ROKU is certainly getting its behind kicked on even the slightest bit of a whisper.

Darthtaco

The market often sells things simply upon rumors of competition when there are many individual investors or institutions that do not understand what they own. Remember, MongoDB was sold based upon news that Amazon developed a database based upon a old MongoDB version?

In my opinion, most of the reason Roku is dropping is that it has been on a incredible recent run and traders are selling to lock in gains and using the excuse of “competition” to sell but I suspect that investors that understand what Roku seems to be doing are looking for buy points to get in.

Starrob

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Guys…guys. And ladies.

I feel like the point being missed so much lately is not whether these are high-growth businesses, businesses with great tailwinds and great TAM, or whether companies are well-run or founder-led. The answers seem affirmative in most cases.

The issue seems to be: what value is it worth? What multiple is it worth?

Others have argued differently, but I toss out most of Roku’s non-Platform revenue, and the remaining is relatively equal to TTD business today. Yes, I am well aware TTD is not all CTV…you are missing the point.

My point is why should I pay double for a company that essentially has great growth on a similar size core runrate revenue base than another well-run high-growth company? What is the motivation for the investment, except to hope that others bid up the price in a purely momentum-based fashion?

ROKU is still $13b mkt cap. TTD is $9b, and the market hates it right now…because…wait for it, it was too expensive at $10b.

Expecting stock prices to continually go up greater than their growth rates just seems silly.

Will the price make sense in 2 years? Sure, maybe. But what is the CAGR then? Will it beat a SPY fund return? If not, then why the heck do it?

Sorry…this is partly about ROKU expectations and partly about things like DDOG IPO being immediately overpriced. I still contend ZM may go higher, but ultimately will have a CAGR barely better than SPY over next year or so.

Momentum goes the opposite way, and if company fundamentals aren’t broken, then it isn’t a turnaround play or a comeback (except for stock price) but merely taking advantage of the market’s momentum by selling when prices are way over-bought and buying when momentum takes them to way over-sold. I think ESTC was oversold in the 70s, ZS in the 40s, not sure yet for TTD but pretty sure the Spring lows of 170s may be their bottom.

Roku was $56 in April and $90 in late June.
Arguing the pros/cons of Roku and their competition are of course instructive long-term, but in terms of CAGR and making money on investments now, anyone have a guess what a fair price is/should be?

In my mind, $100 is about $12b mkt cap (I believe) and their Platform rev at end of this fiscal year is about $650-675m, so that would put their Platform biz at about a 19-20 P/S (napkin math, folks).

I would be interested under $100.

Dreamer

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the possibilities are endless and that is even before talking about big stuff like the NFL, MLB, NBA, NHL, Tennis, Golf, College Football and College Basketball shifting over with all the opportunities for ad targeting
This goes to the crux of my discussion with Darth. If I watch NBA on the new ESPN+ channel on a Roku device does ESPN+ have to make it’s ad spots available for Roku to sell? Remember ESPN has paid lots of money for the NBA contract and would reluctant to give a piece of the pie unless they cannot sell the ad spots themselves.

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Guys…guys. And ladies.

I feel like the point being missed so much lately is not whether these are high-growth businesses, businesses with great tailwinds and great TAM, or whether companies are well-run or founder-led. The answers seem affirmative in most cases.

The issue seems to be: what value is it worth? What multiple is it worth?

Dreamer

I almost feel that I was in a valuation discussion just a short time ago…Oh yes, now I remember…for those that have a Fool subscription it was on the Zscaler board as Zscaler was called “Obscenely Expensive”. This is what I posted:

It took me a long time to figure it out (about 7 or 8 years) but I learned over time that when someone calls something “Expensive”, it is only a opinion in a sea of opinions and that the opinion might not necessarily always be viewed as “right” with the benefit of hindsight. For example, people calling Amazon “Expensive” have in many cases been wrong for years or even decades.

There are occasions that some company’s stock stay “Expensive” for many multiple years and many years later the prices that were once called “Expensive” in hindsight can get viewed as probably being too cheap after the amount of actual sustained revenue growth and earnings growth are assessed.

The problem is that since no human can predict the future with 100% accuracy, the amount of growth and the length of time that various stages of growth can be maintained can only be guessed at.

I guess I am getting a bit wordy in simply saying “Whether a stock gets revealed as ‘Expensive’ or ‘Cheap’ depends upon a unknown future that can only be guessed at.”

When I look at various valuation methods, I look at things in this general way when it comes to companies, “The higher a valuation gets compared to the growth a company is achieving, the greater my possible loss should my future growth assumptions not pan out” and that would often be my biggest take-away when looking at valuation. I make a assessment of how much loss that I am willing to take if my projected growth assumptions should be “wrong”.

Starrob

No one should ever forget that “valuations” are only opinions and they are opinions that can be wrong. I tend to view “valuations” as way to do risk assessment.

The way that I look at it, Roku has huge upside potential and I am willing to currently risk up to 1.5% of my portfolio in Roku at current prices as a starter position to gain that possible upside long term. Different people with different risk tolerances might allocate 0% and others might gamble with 15% but these are individual decisions and I am not about to tell others how to invest.

As for The Trade Desk, the same philosophy applies. Just because others call it too expensive, it does not guarantee the future will reveal that to be so. The Trade Desk might be overpriced, underpriced, or just right for the amount of growth that TTD will produce over the next 5 years but we don’t know for sure about whether our assumptions or anyone else’s assumptions about growth over the next 5 years will be correct about TTD or Roku until we get to September 20, 2024.

Starrob

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This goes to the crux of my discussion with Darth. If I watch NBA on the new ESPN+ channel on a Roku device does ESPN+ have to make it’s ad spots available for Roku to sell? Remember ESPN has paid lots of money for the NBA contract and would reluctant to give a piece of the pie unless they cannot sell the ad spots themselves.

Texmex

I think you missed the part where I mentioned that this will likely all take place over the next 5 to 10 years. The current NBA deal lasts until 2024–25 season. How does anyone specifically know that starting in 2025 that the NBA might decide to create their own app and go direct instead of using intermediaries like ESPN?

The NBA might not decide to be exclusive to any one platform too. The NBA might decide to create a app for Roku, Amazon, Apple TV or whoever the two or three biggest platforms are at the time.

The NBA might also decide to use the Roku channel. Why is that? Roku’s specialty is both in building a audience and monetizing content…but the NBA is only one league…who knows where any of the live content might ultimately wind up…but I do know that the best live content is likely to wind up on the companies building the best platforms today that have the most people watching…which is why I believe the key thing to watch with Roku is Active Users. Roku will likely loosely follow Active Users numbers similar to how Netflix’s stock loosely follows subscribers numbers.

Starrob

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Dreamer-

I think you make a good point to only look at the platform revenue.

But if you only look at the platform revenue, you need to look at the corresponding growth rate.

Last 4 quarters of ROKU platform revenue growth rate: 72% → 78% → 79% → 86%.

Last quarter for TTD 42% and decelerating.

Jim
(long both TTD and ROKU)

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Ok let’s back out platform revenue and device value. Device value we’ll call $2B ($400M growing 36%/years low margins.

That gives Roku Platform Value of about $11B. Full year forecast $1.1B so $700M in rev.

Around 16 P/S for a $700M business growing 86% and accelerating.

That’s back of the napkin math.

Darth

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Last 4 quarters of ROKU platform revenue growth rate: 72% → 78% → 79% → 86%.

Last quarter for TTD 42% and decelerating.

Jim
(long both TTD and ROKU)

Right.
But what premium do you want to pay then, for the Roku Platform business?
Roku at $13b right now, which is about 40% higher than TTD.

Maybe that is a good price to enter. Pretty apparent that $150 wasn’t.

I hear the argument a lot that valuation is an opinion. Ok. Vast majority of investors can’t beat the indexes. How much is their opinion worth?

It should now be taken as fact - not opinion - that the core growth stocks were positively impacted by rotation away from “value” stocks that were more easily impacted by Fed or Trade. This was borne out by massive multiple expansion across SaaS/cloud/growth since 2018.

We saw all these stocks go down at once recently, in a very rare manner. This was not specific to any company fundamentals. Simply a reversal of a momentum trade.

That should make one question whether these stocks are a good value with P/S values that were more common in 2017, 2018, early/mid-2019, or what?

I am barely aware of any technical indicators. I was cautioning against ROKU for no other reason than it seemed all the high-growth stocks with big returns were getting whacked hard in past couple of weeks, and ROKU hadn’t really gotten their turn yet. Sure enough, they plummet on no real news. Comcast devices aren’t news of note…they just aren’t. Especially if you are of the view that Platform rev is all that matters and the size of CTV should be big enough for multiple winners. Just on the secular tailwind, alone, of how CTV will ramp in coming months/years, should be catalyst for ROKU Platform revenue. But going from $30s to $160s in 8 months probably should have been viewed as a momentum trade and NOT the market really really doing due diligence and buying the stock based on Disney+ CTV implications or ARPU or whatever. It was just momentum. Period.

Dreamer

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Not to get too off topic but you brought up TA’s. ROKU broke it’s 50 day moving average today. After that the machines took over.

How else can you explain 59M shares traded when avg volume is around 12M.

It’s the first time this month that ROKU broke the 50 day. The majority of SaaS stocks I follow ripped through their 50 day’s back on the 9th. This is one reason why it may have appeared that ROKU was holding up compared to it’s peers.

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Do you know the viewing hours on a Roku box vs a Playstation device – that also carries all the streaming channels, [and their own network as well, not considering the games for now]

Is Sony’s product more dominant internationally?

Can’t Sony [just one TV maker but still] use their own software in their smart TVs instead of Rokus? Or cut whatever they pay Roku to zero?

Sony also offers up to 618 TV stations as of last year in addition to all the streaming you want - Hulu, Amazon, NFLX, Youtube, MLB, et al.

Sony PS is in the top 5% of buffering rate and delivers a 50% higher bit rate than average. It fully integrates with Roku, Apple, and Amazon - you can use Alexa to tell your PS what shows to play, for example. Does Roku have similar high quality in it’s streaming features - top 5%?

I know the PS used to be the biggest streaming device for Netflix, no longer sure if that’s true.

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How else can you explain 59M shares traded when avg volume is around 12M.

It’s quadruple witching.

AND

Index rebalancing day.

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Is Sony’s product more dominant internationally?

I think this is the only publicly available measurement of streaming share globally.

The Conviva All TV Streaming TV Census Report.

https://www.conviva.com/wp-content/uploads/2018/08/Conviva-Q…

Roku has 22% and PlayStation 7% according to this report. And that’s of all streaming including Connected TV, PC, mobile, etc.

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If one is comparing valuation of roku and the trade desk, one may also consider comparing roku and Pinterest. Pinterest and roku are both ad suppliers while the trade desk is the demand side platform. Pinterest has similar revenue to roku, is selling for a cheaper p/s multiple than roku, and has better margins than roku. Pinterest is probably a better business model proxy, while the trade desk is probably a better industry proxy with its CTV exposure. I am long all three and took a bath on roku today.

All of these high flying growth stocks have huge potential as well as huge risks. It’s amazing to see and feel the ebb and flow of elation and worry.

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Looks like some years ago, Apple’s Steve Jobs forecast the same concerns re: television in this TMF article published earlier today…

…Jobs was answering questions at the D8 Conference back in 2010. The Apple co-founder described one of the biggest challenges in expanding into the living room:
The problem with the television market … the problem with innovation in the television industry is the go-to-market strategy. The television industry fundamentally has a subsidized business model that gives everybody a set-top box for free or for $10 a month, and that pretty much squashes any opportunity for innovation, because nobody is willing to buy a set-top box.

Ask TiVo, ask ReplayTV, ask Roku, ask Vudu, ask us, ask Google in a few months [crowd laughs]. So all you can do … Sony’s tried as well, Panasonic’s tried, a lot of people have tried – they’ve all failed. So all you can do is add a box onto the TV system.

At the time, the Alphabet subsidiary had just announced Google TV, a smart TV platform that was discontinued in 2014 and replaced with Android TV. The inevitable result, Jobs posited, was “a table full of remotes, a cluster full of boxes, a bunch of different UIs.”

…Comcast’s move to distribute subsidized set-top boxes could change that relatively newfound propensity to pay for set-top box innovation. In a research note yesterday outlining a bearish thesis for Roku, Pivotal Research analyst Jeffrey Wlodarczak argued that the competition will “likely drive the cost of OTT devices to zero,” eerily echoing Jobs’ sentiment.

The real question that the industry will face going forward: Will innovation suffer?

https://www.fool.com/investing/2019/09/21/comcasts-giveaway-…

sjo

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Devils in the details as always.

Comcast’s device is not and will never be a device for cord-cutting, which is a primary driver of the movement to streaming.

They have a very walled off approach to this. It comes pre-crippled for cord-cutting. There is no App Store to it. Only select apps are on it. It does include Netflix and Prime and those usual suspects. But cord-cutting services like Sling and PlayStation Vue and similar bundles services are not on the platform and will never be allowed in.

But more on other hidden details.

To be eligible for Xfinity Flex, you’ll need:
-A subscription to Xfinity Internet
-A TV with an available HDMI Port.
-A Xfinity TV Box (Xi6 device). You can lease a maximum of two Streaming TV Boxes online, or three over the phone or at an Xfinity Store ($0 for the first device and $5/month per additional device).
-A leased xFi Gateway (eligible models include Arris 1682G, Arris TG3482G Cisco 3941T or Technicolor CGM4140COM).

That last one costs about $12/mo. Nice catch 22, though to be fair many internet-only customers already have this. Many, particularly of the cord-cutting affinity have their own gateway.

But this is more troubling for Comcast.

I currently subscribe to HBO, Cinemax, Showtime and/or Epix online, can I continue watching on Xfinity Flex using my existing credentials?

No, you’ll need to cancel your existing subscription and purchase these services through Comcast in order to access them on your Xfinity Flex device.

So to do a home with 3 TVS. $10/mo for Flex boxes, $12/mo for a gateway, go through all your premium channel subscriptions and cancel them and re-sign up routing more money to the cable company, and cancel your Sling never to be viewed again.

That’s going to be a big fat no thanks. Comcast seriously thinks they’re going to squeeze another $40-50/mo from people who just want to be free and stream?

Darth

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That is a joke! You buy Roku or Apple TV or Amazon so you can cut the cord. Here Comcast is selling you a worthless box. You have to keep your cable box if you want the streaming box.

If your too stupid to understand that with Sling or Utube TV or ATT TV you get pretty much all Comcast cable offers anyways on a $39 streaming stick, then your like folks who kept their dial wall attached phone that the phone companies milked to the last. Not a great future business but it stretches out the revenue stream.

This Comcast box is a joke. Roku FUD. I don’t know when a good buy is for Roku as I have not followed the financials close enough but I do know a joke of a product when I see it.

Tinker

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Thanks for the link, much appreciated.

Naj

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I went out and bought the Roku stick plus. It is wireless and I thought I would say a little about it.

It was easy to set up and get working but a couple of things are annoying.

Every time it starts up the Roku sign sits there and bounces around for a little time. Would be better if they left that off. The wireless doesn’t always connect so you have to go in and connect it again. It seems slower when moving between apps then the firestick, but the firestick has a hard ethernet connection, so with the ease of wireless I can live with that.

What I like,
Easy to setup and recommend channels. Has it’s own free channel.

Now that I have the Roku, and the Firestick, I think for most people it won’t matter which one they get. I prefer the Firestick because it seems like a more clean interface, but that might be because I have had it longer. So it will all come down to the price.

Andy

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Now that I have the Roku, and the Firestick, I think for most people it won’t matter which one they get. I prefer the Firestick because it seems like a more clean interface, but that might be because I have had it longer. So it will all come down to the price.

In reality, more and more TVs are going to have Fire, Roku, Android, or the OS that the TV maker themselves installed so you won’t need to buy a stick. And at the end of the day, 99% of the content relevant to viewers will be available on any and all of these systems that people care about. I’ve talked to a few people who have both systems, they don’t really have a preference for one over the other. Now, at this time, ROKU seems to have the biggest library, and that may be a good selling point. After spending time on Roku, it seems most of that free content is B-Rated movies.

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