ROKU Thoughts

[Phoolio18]

I began looking into ROKU a bit further and wanted to comment on a few things.

First, I think it is best to look at ROKU without the player segment and assume that business is pass through and, therefore, eliminate it from the equation. Yes, that business has posted positive margins, but without it, the comparison to other software/platform companies becomes a bit more appropriate.

Also, ROKU doesn’t seem to post non-GAAP expenses, but only GAAP. So, I added back in SBC to the GAAP numbers in order to get to an Operating Margin.

Based on platform revenues only. Starting at the top is Q2 2018 through Q2 2019 at the bottom.

  GM     R&D     S&M     G&A    SBC       OpM
69.8%	44.5%	24.7%	17.1%	5.9%	-10.6%
70.5%	45.4%	25.6%	19.8%	6.6%	-13.6%
72.2%	33.7%	22.9%	14.0%	5.9%	 7.6%
69.9%	41.5%	25.2%	16.5%	8.7%	-4.6%
65.4%	37.0%	21.8%	15.5%	7.5%	-1.4%

And the valuation as of today is a P/S of 29.6x (EV/S of 28.9x) based on platform only.

As we know, platform grew 86% this quarter. Additionally, we see leverage happening in the business as all costs have come down as a percent of platform sales over time.

I just began diving into and thinking about ROKU and from a stock appreciation perspective, I’m late to the party and have mixed views. I like seeing some leverage in the model. I like the growth rate. Gross margins dropping 4% is a concern. The valuation is in the upper tier of companies we follow especially compared to the gross margin.

While I question their competitive advantage, I also see the importance of being neutral. They are the only streaming platform seems to connect with all others and provide a single place to do so. This could be powerful if they can keep it up. I don’t profess to know the risks involved with that.

I’d be interested to see if other’s have any thoughts on the above.
I thought this post may at least provide ROKU in a different light by ignoring the player component even if it doesn’t start much conversation.

A.J.

[jojoswims]

AJ, I don’t post as a rule but understand all the hoopla with Roku. I have a position in Netflix that’s taken a hit lately, and I’d like to understand why. As I understand it, the street is concerned about subscriber numbers and content from Netflix. Where will Roku get their subscribers and what kind of content will they provide?

[hmcproperties]

I recently took a position in ROKU as part of my CTV basket of stocks that includes: ROKU, TTD and TLRA

The following thoughts on ROKU, apart from the hardware component are courtesy of Beth Kindig. I subscribe to her service and she has given me permission, via email, to share thoughts in this type of forum, even though content originates from a paid subscription service.

Not sure if this format will be helpful; but I will just present some of Beth’s discussion on fundamentals in bullet point format:

• Roku is the only pure-play CTV ad option that owns its own hardware platform and operating system

• Roku also has the advantage of knowing OTT better than any other company as the original provider of
  set-top-boxes

• Connected TV ads and OTT hardware is the company’s 100% laser focus.

• When it comes to content; According to Nielson, only 20% of time is spent on original programming while 80% of time is spent on catalog content.

• ROKU’s growth has come from offering free content that is ad-supported as opposed to the competition that offers subscription/fee based content that still has ads; resulting in OTT subscription fatigue

• Cord cutting has looked something like this: 2011 = 8,000 cord cutters, 2012 = 164,000, 2014 = 3,000,000; cord cutting growth combined with CTV programmatic growth are two significant tailwinds for ROKU

• CTV ads continue to show triple-digit growth and four-digit growth in some formats; and as a pure play option, and a significant portion of Roku’s revenue comes from capitalizing on CTV programmatic advertising.

• Roku has a significant amount of proprietary data for advertisers to leverage. By owning the viewing
  platform, Roku is able to collect data across OTT apps

• Roku’s revenue turnaround will most likely parallel the trajectory of CTV ads. CTV ads were nascent in 2017 and started gaining traction in 2018.

• Most recently, Roku reported 79% growth YoY in Q1 2019 on its ad platform revenue with total revenue at $134M.

The second component of growth, the hardware component is not addressed here due to the subject/direction of this thread.

I hope this ads something of value to your discussion,

Harley

[addedupon]

Hi hmc!

Thanks for that excellent summary from the able beth kindig who is very knowledgeable of both ROKU and TTD.

I would add one more competitive advantage that ROKU has which is associated with their proprietary ad tech data to which you refer. While targeted, they don’t individually identify targeted consumers, but rather by demographic, unlike the increasingly untrustworthy giants seen as going to far in threatening privacy such as Amazon, Facebook, Netflix, and Google.

In that regard, the only serious competition to Roku hypergrowth i can see might be coming is from the recent deal between Amazon and TTD, which together could yield a service that provides that kind of consumer privacy protection.

But i am not tech savvy and may not see that TTD/Amzn deal correctly.

Did beth discuss any increased competition to ROKU from TTD teaming up with fire stick? In an email reply to me, she simply that in her opinion there is room for both ROKU and TTD.

I’m a follower of beth but not yet a subscriber, Though i had encouraged her to start her own premium service, i am inhibited by her lofty fee, which is more than Bert, Stock Advisor, and Rule Breakers combined.

[hmcproperties]

Did beth discuss any increased competition to ROKU from TTD teaming up with fire stick? In an email reply to me, she simply that in her opinion there is room for both ROKU and TTD.
_______

I do not offer myself up as a CTV Programmatic Advertising guru; however, in the Ad Exchange space, ROKU would be seen as a Content Owner/Publisher or maybe more specifically an OTT Platform/Player and The Trade Desk would be a DSP (Demand Side Platform or more generally a third-party ad network. Both participating in the Ad Exchange but on different ends of the transaction. Perhaps, at times, even in a more cooperative engagement as The Trade Desk presents Roku with buyers for the ad space Roku is looking to sell. Therefore, in many instances, Roku and The Trade Desk would be working in the same environment, but not as direct competitors. Roku’s continued competition is going to be for “eyeballs” as it continues to compete with the big 4 for consumers’ time spent on over-the-top applications (Netflix, Hulu, YouTube, and Amazon).

A very prolific poster to a number of the TMF boards, Starrob, has posted great content as it pertains to the CTV and Programmatic Advertising space that is well worth the read if you have access.

Now, as it pertains to your comment regarding The Trade Desk teaming up with Amazon; Beth provides the following thoughts which I have paraphrased below per my understanding with her:

- Amazon Publisher Services is partnering with The Trade Desk and Dataxu TouchPoint

- Providing advertisers access to Amazon’s inventory on Amazon’s Fire TV marketplace

- Publishers on Amazon’s Fire TV marketplace will also benefit from increased access to advertisers via TTD and other demand side platforms (DSPs)

- Amazon will likely open up ads to even more DSPs with CTV advertisers.

- The Trade Desk will be competing with Dataxu and Amazon DSP on Fire TV inventory for now

- But it’s likely there will be more DSPs joining Amazon platform as it is common for the supply side (content publishers) to work with as many buyers (advertisers) as possible

- At this time, it’s not clear if The Trade Desk and Dataxu’s demand will be as competitive on CPMs (cost-per-mile; cost per thousand). Amazon has the better in-house data and targeting information

- This new partnership could also be presented as a PR move by Amazon; The Trade Desk and Dataxu are competitors to Amazon’s own Amazon DSP. By giving away a small piece of the Connected TV pie, Amazon helps to protect itself from anti-trust issues

Thanks,

Harley

[JKB2016]

This came across this morning re ROKU.

ROKU : Roku growing faster than Netflix, says bull; ROKU +1.4% • 8:31 AM
William Blair analysts expect Roku (NASDAQ:ROKU) to hit 80M active accounts by 2025 with platform revenue of $4.5B.
In the recent Q2 report, Roku said it reached 30.5M active users in the quarter, up 39% Y/Y.
The firm says Roku’s streaming service is growing faster than Netflix at its international expansion stage.
Key quote: “Looking at Roku’s most recent nine quarters against those of Netflix in the beginning stages of Phase II, Roku, on average, achieved 9% quarter-over-quarter growth, compared with Netflix’s average of 8%.”
William Blair maintains an Outperform rating and $145 price target. The company has an Outperform average Sell Side rating.
Roku shares are up 1.4% pre-market to $145.02.

[JPutter]

AJ,
Thanks for starting this thread. And it’s a great way to look at ROKU.

"I just began diving into and thinking about ROKU and from a stock appreciation perspective, I’m late to the party and have mixed views. I like seeing some leverage in the model. I like the growth rate. Gross margins dropping 4% is a concern. The valuation is in the upper tier of companies we follow especially compared to the gross margin.

While I question their competitive advantage, I also see the importance of being neutral. They are the only streaming platform seems to connect with all others and provide a single place to do so. This could be powerful if they can keep it up. I don’t profess to know the risks involved with that."

Are you sure you’re late to the party? Or are you early?

1.) This is the news about the Disney+ launch (which could garner 75MM subs). This is subject to change of course, but the value of being agnostic to Amazon, Apple, Google is helpful

“The Disney+ app will be available on a variety of smart TVs and connected TV devices, such as Apple TV, Google Chromecast and Roku. It also will be accessible via iOS devices, Android phones and gaming consoles such as XBox One and PlayStation 4. Notably absent from the list of devices that will support Disney+ at launch are Amazon Fire and Fire TVs.”

2.) They haven’t started International expansion yet, although this is an analyst comment about it(JKB referenced in the thread, just a different part of the analyst note)

"Schackart reaffirmed his Outperform rating for Roku shares, citing optimism over its international growth prospects. “Roku will experience similar phased stages of international growth as Netflix [NFLX] did during its international expansion,” he wrote. The analyst predicts Roku’s active-accounts base will rise to more than 80 million by 2025 from the current 30.5 million. He also forecasts annual revenue per user will reach $58 by 2025 from the roughly $20 today.

Double the customers. Triple the RPU. Hmmm.
Putter

[Phoolio18]

https://seekingalpha.com/news/3495065-amazon-wants-exclusive…

Will be interesting to see if this puts any pressure on Roku’s price and also to see if it puts pressure on Roku’s business. I haven’t thought about it much yet.

Recently, Amazon announced they are going after Shopify’s SMB market. Didn’t affect Shopify at all and I don’t think it will affect their business. In retail, Amazon has a conflict of interest with its sellers, but most sellers have had to live with until Shopify came along. I’m not sure if this trend will reverse. Amazon will still be a retail behemoth but plenty of room for Shopify.

Anyway, is this similar to Shopify or a real threat? Dunno.

AJ

[BobbyBe]

Breaking down the numbers…

Roku’s TTM revenue is $905.8M
Analyst is predicting $4.64B revenue in 2025. That’s about 50% growth every year for the next five years.

So 2025 revenue is predicted to be 5.12x current ttm revenue.

If we imagine that the P/S ratio of the company gets cut in half as the company matures, this results in 2.06x return on an investment in Roku over the next five years (not factoring in dilution). This gives a CAGR of about 15%.

Not bad. Is this a realistic scenario? I don’t know. Maybe Roku’s multiple will expand instead of contract over that time frame. Maybe they will earn more. Maybe they will earn less. Schakert is an analyst at William Blair. He has a price target on Roku of 145. The highest price target amongst analysts on Roku is 150. So he’s a relatively strong bull, but not the most bullish of the bunch.

Food for thought.

[JPutter]

Just to be clear, AJ, IMDb is going to compete with Roku channel on linear (the description in the WSJ article). IMDb might be big. Currently, it’s not part of the Prime or Fire TV part of the business (it’s in Marketing).

The race for content is on and Amazon appears dedicated to it. (they are all competing for it). I see IMDb as a competitor to ROKU in the ad supported space but no more than anyone else at this point. Like ABC vs NBC vs CBS…

It’s not a reason to steer clear of ROKU (there are other reasons perhaps)
P

[hmcproperties]

First things First…I am on the older end of the age continuum. I remember back in the '80’s when home security systems would cost you a fortune to purchase and install. Then, just a few years later, perhaps the mid-late '90’s, home security companies were literally, not figuratively, giving the equipment away because they knew that the money was in the monthly monitoring fee. (hSaaS…Home Security as a Service)

Roku hardware is coming down in price to capture market share; they would like nothing better than to have their hardware everywhere around the globe and perhaps someday for FREE, because instead of the monthly home security monitoring fee, they want to monetize “eyeballs”; an opportunity to drive CPM and substantially increase revenue related to CTV programmatic advertising.

Low priced hardware plus FREE content, including 3,000 channels, will be the perfect combination for price conscious consumers in emerging markets. Do you want to throw gas on that fire? How about Roku’s FREE app for the 3 Billion smartphones that will have people all over the world watching FREE content like Adult Swim on their phones during their lunch break.

Harley
If it isn’t obvious by now, I have a long position in ROKU
[Some concepts discussed were from a fee subscription service that I have permission to share.]

[shikotus]

Oh man, I just posted a whole long thing on Roku in Stocknovice’s portfolio review thread… wish I saw this one first! I am going to throw the link in here, since I think it’s quite relevant to this discussion.

https://discussion.fool.com/i-think-there-are-two-aspects-to-rok…