ROKU downgrade today

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In Barrons: https://www.barrons.com/articles/roku-stock-falls-after-anal…

Kyle Evans didn’t have “new” information, but just wanted to state is worry about TCL, which makes the ROKU-branded TVs. He says that market-share wise it’s been great, but that people buying those TVs aren’t "participating meaningfully in Roku’s downstream advertising/commerce economics.”

He’s also worried about potential competition, for instance, there’s nothing to stop TCL from partnering with Amazon and doing a built-in Fire stick, or partnering with Google. That said, Evans does also think there’s a chance that TCL will go global with ROKU.

Elsewhere, Evans also cites the “slow pace” of Roku’s international expansion, as well as the potential for investor expectations to continue to climb, perhaps past the point of what can be reasonably expected.

I haven’t followed ROKY in enough depth to fully understand the TCL partnership and the concerns about it that Evans is expressing. I do know that as a ROKU owner/user (separate box), we’ve never made a purchase except through Amazon video, and we’ve watch maybe 2 movies with commercials, which was annoying enough that we will be unlikely to do that again.

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Kyle Evans didn’t have “new” information, but just wanted to state is worry about TCL, which makes the ROKU-branded TVs. He says that market-share wise it’s been great, but that people buying those TVs aren’t "participating meaningfully in Roku’s downstream advertising/commerce economics.”

The fact that he didn’t have new information is enough for me to yawn at this. Personally I’m not sure why the TCL TV viewers would participate differently than the Roku dongle users. If there were still a majority of the population who was non-streaming, I could see it. But judging by the number of people with Netflix, Disney Plus, Amazon Prime, etc…I think people buying the TCL sets are watching via Roku.

My conviction on Roku hasn’t really changed. The only reason I haven’t added more is because I think AJ made a good point about margins here: https://discussion.fool.com/paul-this-is-exactly-the-current-pro…

I see that as something to watch, but not a thesis-busting problem. I have waited to add more since then even as Roku has drifted lower, but I added a little today after the drop. It’s still a large (about 12%) position.

Bear

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But judging by the number of people with Netflix, Disney Plus, Amazon Prime, etc…I think people buying the TCL sets are watching via Roku.

Outside of the hardware, which I think has low margin, how is Roku making money when people watch via those services? I use some of those, and don’t see any ads, so what’s going on?

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Outside of the hardware, which I think has low margin, how is Roku making money when people watch via those services? I use some of those, and don’t see any ads, so what’s going on?

  • There are ads you may not notice, like one big one on Roku’s…I don’t know what to call it…“home screen?”

  • You may not do this, but some users purchase subscriptions through their Roku to NFLX or Disney+ or HBO or whatever, and Roku gets a commission for this (though as we have discussed in the past, Roku is cagey about breaking down how many and what they get: https://discussion.fool.com/one-of-the-most-comments-i-hear-from…)

  • One thing Roku gets from having you as a user (along with 40 million of your closest friends) is a virtuous cycle, or network effect. Having a lot of users leads to Roku having more leverage with streaming services, as well as TV makers who may want to sell TV sets with Roku built in. All this leads to even more users. My take here is that with 40 million users, Roku has won. They’re too big a player to be ignored, and my theory is their user base will continue to grow just because of this network effect. I admit they have a lot of stakeholders to keep happy between users (who don’t want too many ads) and services (who don’t want to share too much revenue with Roku) and TV makers (who may want to get in on the streaming action, even though it’s easier to let Roku do it). But Roku has been able to thread the needle so far.

Bear

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- There are ads you may not notice, like one big one on Roku’s…I don’t know what to call it…“home screen?”

OK, if I scroll to show the channels/services list/matrix I’ve put together there’s an ad. I’ve seen 2 different ones so far. One was a Roku ad, so they’re not making any money off themselves. The other was for an Acorn TV trial. Not making much money off of that.

Like I said, there are ad-supported channels, including at least one that is Roku’s own. But, that’s only for old content (like some 1940’s movie I wanted to re-watch), not recent content.

What I do like about the Roku box is its Search feature, which lets me search for a movie across all services, with prices. No ads while using that feature. So far.

I would imagine that services pay Roku a sales commission if a user signs up for the service via their Roku. I would highly doubt that would be an ongoing fee, though. This year-old article claims Apple had been charging Netflix 15% of any sale done through AppleTV (https://www.nytimes.com/2019/03/22/multimedia/netflix-apple-… ). Netflix worked around that by having the sign-up take you “an external website.”

Roku itself pays referral fees to web sites that send people to roku.com to sign-up. https://www.roku.com/about/affiliate But, that page must be old because it says Roku has sold only a million players.

My take here is that with 40 million users, Roku has won. They’re too big a player to be ignored, and my theory is their user base will continue to grow just because of this network effect.

Well, that same article claims Apple has 1.4 Billion devices. Another article out a couple of days ago claims Hulu itself has 32 million subscribers (https://www.theverge.com/2020/5/21/21262291/apple-tv-plus-mo… ) Disney+ at 29 million (https://www.fool.com/investing/2020/02/06/disney-netflix-and… )So, 40 million accounts (how many MAUs, btw?) doesn’t seem so huge in context.

And, I don’t see how a “network effect” brings in any new users. OK, maybe if someone wants a second TV and they have Roku they’ll buy a second one (same account, though), but it’s not like I run around telling all my friends how great Roku is. At least not the way Apple or Tesla customers do.

And from a user perspective, I don’t see anything sticky with regards to Roku except the Search feature. I can, and do, watch my services on things other than my one Roku box.

From a TV set maker perspective, I’ve personally seen LG cut back on their software, which is based on WebOS (my OLED dates back to 2014), so I could see where TV makers struggle to develop software that users will love, but it’s not like many people base their TV decision on how easy it is to choose Netflix versus Amazon, just that both are available. This is going to be tough - paying Roku for the streaming software/hardware design may be easier for TV makers, but it means they don’t get any of that great revenue you say Roku gets.

Anyway, thanks for the Roku discussion. I’m considering selling my shares next week.

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Agree with you Bear.

See the report below:
https://blog.pixalate.com/ott-ctv-programmatic-ad-device-mar…

In 2019, 59% of all programmatic OTT/CTV video advertisements went to Roku devices. In fact, Roku has over 3x the market share compared to any other OTT/CTV device type.

Here are the top five device types in terms of 2019 market share:

Roku (59%)
Amazon (19%)
Chromecast (4%)
LG (4%)
Samsung (3%)
“Market share” is based on the share of voice of programmatic video OTT/CTV ad impressions served to devices, based on device manufacturer, as measured by Pixalate.

With 59% ad market share and >3x compare to the closest competitor Amazon, Roku has won.

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Hi Smorgasbord
You write that Evans states that “but that people buying those TV’s aren’t participating meaningfully in Roku’s downstream advertising/commerce economics.”, in framing the TCL concern.

This is actually not the concern. The concern is that TCL itself is the entity that isn’t participating. Therefore, the problem is that ROKU is benefitting greatly from its relationship with TCL. But, TCL, with paper thin margins and a stock price that has stagnated for 5 years, is not really benefiting at all. The question is how much longer can this last? How much longer until TCL is either looking for a bigger piece of the economics or before it seeks out more profitable partnerships.

Tree

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In 2019, 59% of all programmatic OTT/CTV video advertisements went to Roku devices.

59% of what size pie, in dollars? Can you compare that to mobile and/or web? How many ad dollars compared to, say YouTube?

Streaming OTT services through Netflix and Amazon Prime are now the predominant way to consume content, and most streaming takes place on mobile devices.

https://martechseries.com/mts-insights/guest-authors/5-billi…

Here’s Roku pitching their ad services:
https://advertising.roku.com/Advertiser-Solutions

In addition to :15 and :30 spots, we offer full-screen interactive video and overlays that invite consumers to engage with brands in new and immersive ways.

BTW, I had asked about Roku Active Users (versus boxes sold). From https://tinuiti.com/blog/ott-over-the-top-ads/roku-advertisi… As of Dec 31, 2019, there were 52 million Roku devices with 36.9 Active Users.

As for the size of the ad business for Roku, I found this from Jan 2019: https://www.emarketer.com/content/10-ways-roku-is-growing-it…

Note the “Roku Ad Revenues” chart mid way down the page. $433M in 2019 and expected $632.9M in 2020. Growing, but the % change is shrinking each year (from 117% in 2017 to 109.9% in 2018 to 66.7% in 2019 to an expected 46.2% in 2020).

What sort of Ad Revenue growth is already priced into the stock?

That article lists 10 ways Roku makes money from ads:

  1. Selling publishers’ inventory When people watch ad-supported publishers on Roku, the platform gets access to sell some of the publisher’s inventory in exchange for the extended audience reach it provides. Roku has found this to be a more reliable strategy than asking publishers for a cut every time an ad runs on the platform.
  2. Subscription kick-back. This includes subscribing to Showtime and Starz from within Roku’s own channel, in which users have just 1 bill (to Roku) to pay.
  3. Selling publishers audience-data.
  4. Display ads (as we discussed earlier)
  5. Channel recommendations (some editorial, some paid). This is when you hit “Streaming Channels” and it gives you a list from which to choose which ones you want to add.
  6. Its own Roku channel, which has ads
  7. Sponsored shows. Some of the content in Roku’s own channel is sponsored.
  8. Email marketing (I’ve opted out of this so I don’t know about it).
  9. Remote Buttons (those direct go-to service buttons on the remote)
  10. TV manufacturer deals (like TCL discussed earlier). These are “low- or no-economic deals.”
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“59% of what size pie, in dollars? Can you compare that to mobile and/or web? How many ad dollars compared to, say YouTube?“

Smorg,

From the article this is what they say about the pie.

“Market share” is based on the share of voice of programmatic video OTT/CTV ad impressions served to devices, based on device manufacturer, as measured by Pixalate.

They are talking about percentage of ads delivered on devices. So Roku’s direct competition for platform distribution. It’s not a measurement of platform revenue but more of an indication of content delivery/monetization.

That’s a remarkable share over their competition.

Darth

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Outside of the hardware, which I think has low margin, how is Roku making money when people watch via those services? I use some of those, and don’t see any ads, so what’s going on?

Every publisher that wants to distribute content on ROKU has a distribution deal with Roku. Roku’s clout in establishing these deals has increased over the years as they now command about 44% of global CTV streaming hours and about 25% of global streaming viewing hours.

They have a distribution deal with, say Netflix, a SVOD service. They calculate up an estimated value of subscriber signups over the deal period and number of already signed up through Roku and agree to some percentage of that for Roku share. Then they wrap up promotions such as home screen ad placements and joint ad campaigns and any other of multitude of services like data analytics. And then performance metrics, where if Roku meets those obligations, it triggers additional value to the contract.

That all gets wrapped up into a distribution deal which would be for a $xxM dollar 2 year deal or something like that.

There’s lots of ways that Roku monetizes it’s delivery of content. Everything and every viewer gets monetized in some manner. Some more directly than others and some more than others.

Darth

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I wonder how much Roku charges to get a special button on the remote. Ours has four buttons including Netflix and Hulu. I’m sure they had to pay to have special access to the remote.

1poorguy

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I wonder how much Roku charges to get a special button on the remote. Ours has four buttons including Netflix and Hulu. I’m sure they had to pay to have special access to the remote.

1poorguy

I read somewhere it is $1 per remote… however, this seems to be one time and just helps reduce price to sell those things.

Though I would suspect Roku forces / prioritizes those with some additional recurring revenue… I can see Disney+ or similar established big name company starting OTT would benefit to ROKU in more than one ways.

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They are talking about percentage of ads delivered on devices. So Roku’s direct competition for platform distribution. It’s not a measurement of platform revenue but more of an indication of content delivery/monetization.

That’s a remarkable share over their competition.

Share schmare, Big fish Little pond. Roku’s 37 Million Active Users is a bit less than Amazon’s claimed 40 Million FireTV users (https://adage.com/article/digital/roku-fourth-quarter-report… ).

Here are two good number-crunching articles on Roku:
https://dashboards.trefis.com/data/companies/ROKU/no-login-r…
https://dashboards.trefis.com/data/companies/ROKU/no-login-r…

3/4 of Roku’s revenue comes from Ads & Commissions, the rest from Devices & Accessories. More importantly, Ads & Commissions is expected to grow almost 60% while Devices & Accessories only by 5%. However, the dollar amount increase in Total Revenue is pretty stagnant, with the result that the rate of growth is actually decreasing:


**Year   Total Revenue    Growth from Prev Year**
2017       $0.5B               N/A
2018       $0.7B               44.8%
2019       $1.1B               **52.0%**
2020       $1.6B (exp)         **40.5%**
2021       $2.1B (exp)         **30.4%**

So, I don’t get the excitement over Roku, unless you’re saying that the actual revenue numbers are going to be larger than expected. This looks to be a flat $500 Million revenue for last year and the next 2 years. What’s going to change that?

So, yeah, the mid-March sale on ROKU was a great time to buy, but what’s the story from here? How is this company worth being considered in the same bucket as our actual high-growth companies?

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Share shmare?

Ok. Conversation not worth having

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Ok. Conversation not worth having

Isn’t it? The next line in the post was I think relevant: big fish little pond.

If you have 90% of a market that is (let’s say) $1M per year, that’s $900K. For an individual that is a lot of money. For a company, not so much. How big is that pond? If it’s a small pond, your growth is limited.

Actually it is anyway regardless of the size of the pond (i.e. you can only grow to the size of the pond), but in many/most markets that is such an overwhelming figure that we treat it as limitless, in which case share becomes an important metric.

Unless the product itself grows the size of the pond organically. The PC comes to mind. Originally it was a product in search of an appeal. Green screens, Visicalc, and not much else. I remember those days quite well. By expanding what the PC could do the pond also expanded.

In this case Roku could perhaps encourage (and enable) people to “cut the cable”, and go to all-streaming service. We did that last year, for example. The more people that do that, the bigger the pond Roku is swimming in.

1poorguy

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3/4 of Roku’s revenue comes from Ads & Commissions, the rest from Devices & Accessories. More importantly, Ads & Commissions is expected to grow almost 60% while Devices & Accessories only by 5%. However, the dollar amount increase in Total Revenue is pretty stagnant, with the result that the rate of growth is actually decreasing:

Year Total Revenue Growth from Prev Year
2017 $0.5B N/A
2018 $0.7B 44.8%
2019 $1.1B 52.0%
2020 $1.6B (exp) 40.5%
2021 $2.1B (exp) 30.4%

So, I don’t get the excitement over Roku, unless you’re saying that the actual revenue numbers are going to be larger than expected. This looks to be a flat $500 Million revenue for last year and the next 2 years. What’s going to change that?

This statement doesn’t make sense. If 3/4 of their revenue comes from ads and commissions which is expected to grow at 60% how could total revenue be stagnant. Granted past performance isn’t a guarantee of future revenue but I do tend to lean on their past more than I do analysts estimations. If there’s anything I’ve learned about analysis estimates is that the are rarely if ever accurate. You are saying ROKU’s rate of growth is decreasing but thats not the case. It may be the case if we believe the projected revenue but their history is painting a different picture.

I don’t know if you meant it this way but saying it looks to be a flat $500 million revenue for last year is a bit misleading. That $500 million was a 52% increase over the past year. Granted if they slow their growth to only add $500 million annually for the next two years then I’d wonder about the company as well but this hasn’t been the trend. Their annual and quarterly revenue growth has been as follows:

2019 2018 2017 2016
52.0% 44.8% 28.6% 24.6%

Q1-20 Q4-19 Q3-19 Q2-19 Q1-19
55.2% 49.1% 50.5% 59.5% 51.3%

I have a real hard time quantifying ROKU compared to some of my other companies but saying they are reporting stagnant revenues or a decreasing rate of growth isn’t accurate.

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I don’t know if you meant it this way but saying it looks to be a flat $500 million revenue for last year is a bit misleading. That $500 million was a 52% increase over the past year. Granted if they slow their growth to only add $500 million annually for the next two years then I’d wonder about the company as well but this hasn’t been the trend.

But, Roku themselves say the trend has changed. They withdrew 2020 guidance (which I don’t feel is truly justified) and said:

We anticipate that our ad business will continue to grow substantially on a year-over-year basis, albeit at a slower pace and lower gross profit than we originally expected for the year.
(https://www.fool.com/earnings/call-transcripts/2020/05/07/ro… )

So, tell me how you think Roku’s revenue will grow faster when they themselves are saying to expect slower growth?

As they explained:
our advertising business has seen cancellations as some marketing budgets have declined, but this has been partially offset by new marketing budgets moving to Roku from traditional TV given the cancellation of high-profile live sporting and entertainment events as marketers follow viewers and increasingly seek targeted measurable forms of advertising.

Note the phrase “partially offset,” not fully offset.

the overall ad marketplace is down and Roku is not immune. That said, we are much better positioned than linear television.

Isn’t this a double-whammy? First that Covid isn’t the boost to Roku that people might assume (remember whether you watch 1 show or 1000 shows on Netflix Roku gets the same amount, which might be nothing). Second, that they’re looking to linear television for comparison? As I’ve been trying to say, the real market is mobile. Roku talks tens of millions, while mobile companies talk billions. Yeah, linear tv is dying and they can grab some of that marketshare. Little pond. What Roku isn’t saying is how they will capture revenue as more and more people stream on mobile first and primarily. That’s where the real growth is.

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Unless the product itself grows the size of the pond organically. The PC comes to mind. Originally it was a product in search of an appeal. Green screens, Visicalc, and not much else. I remember those days quite well. By expanding what the PC could do the pond also expanded.

Yes, but it’s too easy to get caught up in general expansion when what matters is Roku’s ability to expand revenue. Remember, Roku doesn’t get paid per hour of streamed content. If I watch 1 movie on Netflix or 1000, Roku doesn’t make any more or less money.

Roku gets paid when they sell devices (a 5% growth area for them), and when they sell advertising or collect fees for things like signups. So when in the conference call they state how many more hours are being streamed, don’t pay attention. What matters is how many more ads are being placed or how many more people are signing up for content services through Roku. We know the former is down. I don’t suspect the latter is a huge opportunity for them. How many people signed up for Apple TV+ through Roku? Probably rounds to zero. How many signed up for Disney’s service through Roku? That’s a fair question, no?

And while linear TV usage is dropping and more people are signing up for streaming, how many new sign-ups are we talking about and what percentage of those sign-up dollars is Roku getting? I would suspect many people already have streaming and TV, and maybe now they’re dropping TV, but does that create enough new signups through Roku to be a real growth opportunity for them?

Remember, we have high growth standards for stocks we choose here. Roku’s growth certainly isn’t in the same ballpark and may not even be in the same league. (Assuming you-all remember what baseball is, right?)

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If we look at best seller smart tv in Amazon, Roku took 8 out of top 10! That’s to me much more than 1 in 3 market share. More interestingly, Amazon doesn’t have stock for 6 of them, does it mean they all sold out?

https://www.amazon.com/Best-Sellers-Electronics-Smart-TV/zgb…

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Remember, Roku doesn’t get paid per hour of streamed content.

If I were an investor (I was for a short while), I would be concerned about that. When I “cut the cable” I brought all of my subs over to Roku. I didn’t sign up for anything via Roku. So all the got from me was buying the “dongle”. Even Disney+; they offered Disney credit card holders a deal if we prepaid for (I think 3 years?). It was like half the normal subscription. So I signed up for that, and ported it over to Roku. Thus they didn’t get anything from that either.

Google displays ads all the time, and they get revenue from hit. Roku seems to display ads in the side bar until you select a service, and then Roku isn’t involved anymore. That doesn’t seem like a lot of potential ad revenue to me.

There doesn’t seem to be too many opportunities for them to get revenue since they apparently don’t charge for hosting the platform (e.g. Netflix doesn’t have to pay if I go to the Netflix service to watch something via Roku). Maybe they could serve as the platform for smart TVs, charging for their OS per TV sold. Microsoft made that work for DOS on the first PCs.