Roku

Investment Analysis Clubs Saul’s Investing Discussions
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Thoughts on Roku? Seems cheap and with huge potential. Reminds me of a young Netflix. Revenue growth is only at 39% but I believe that the growth with dramatically increase this year with their Roku Channel app and the fact that several tv companies are building Roku into their TVs.

Great article: https://www.google.com/amp/s/investorplace.com/2018/09/the-5…

The Numbers: There are three big ways that Roku makes money. One, through the sale of streaming devices, which is a lumpy business with scanty profit margins. Two, through paid streaming subscription revenue shares, which is a steady, annually recurring business with huge profit margins. Three, through the sale of digital ads, which is also a steady business with huge profit margins.

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Here is the problem I have with Roku (I own 4 Roku devices, having just bought the Roku Ultra for 4K UHD streaming - so I love their devices. Also have 1 Apple TV so know how good that works as well - in the end both are great): The stock is incredibly cheap on a price to sales basis. So cheap that one has to wonder why.

I mean, take Talend, the consensus is “growth at a discount,” or “growth at reasonable value.” How well did that work out for you? When something becomes so much cheaper than its peers you really have to look at it and ask why is it so cheap.

Sometimes there are hidden revenues (say Twilio or Nutanix), sometimes the company just really screwed up (say Nvidia - but we all know that Nvidia will be back), but other times there are just things that make it cheap.

Sometimes, like Pure, its products (although selling nicely) are bound to remain a niche and thus the market, despite great earnings reports, pummels a cheap stock making it even cheaper.

Hey, Micron, selling for on a P/E of 3, market must be crazy! Well, not really. Always surprises me how people associate “cheap” with potential stock appreciation. The market is not stupid or simply mispricing Micron way too cheap as if Micron was somehow under the radar and undiscovered gem. There is always a reason. It is finding that reason and determining if it is mis-priced or not for some reason that is not straight-forward and easy for the market to figure out.

As to Roku, first Roku may not be as cheap as we think. I am sure that a material portion of their revenues come from selling Roku devices. I wager those devices sell at very low margins, thus mostly irrelevant revenue as it will never produce meaningful profit (the hardware). The real cost of Roku then is higher because the productive revenue is much lower.

Second Roku is not doing anything multiple other competitors are not doing. But then again so do the networks do the same things the other networks do. It is the eyeballs. Roku is growing eyeballs. However Roku eyeballs still pale in comparison to many of its competitors. If you think Roku can grow into say a 50 million real user base that sticks with Roku, without the Roku platform becoming disrupted (as streaming platforms like Roku are disrupting cable boxes) then you have a stock is incredibly undervalued.

I honestly don’t know. But the first question to ask is why is Roku selling for so cheap? Dig into it. If there are reasons that really stand out to you that seem to be transitory or overdone, then dig further. If not, then it is this cheap for a reason.

There is a reason why David Gardner, amongst his six rules specifies that he wants his stocks to have high relative strength (not Roku), and to be considered grossly overvalued (not Roku). If you look at Saul’s port, although Saul has different methods (as we all do, although we also share many) none of the stocks he owns are “cheap”.

So someone perhaps can contribute here, why is Roku so cheap? And why is the market wrong in making the stock so cheap? Perhaps there is a mispricing issue going on here for reasons that are not straight-forward enough for an efficient market to have properly priced.

Tinker

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Hey, Micron, selling for on a P/E of 3, market must be crazy! Well, not really. Always surprises me how people associate “cheap” with potential stock appreciation. The market is not stupid or simply mispricing Micron way too cheap as if Micron was somehow under the radar and undiscovered gem. There is always a reason. It is finding that reason and determining if it is mis-priced or not for some reason that is not straight-forward and easy for the market to figure out.

I believe Micron will surprise you. The lines of debate are quite clear: There are those who believe memory chips are purely commodity items and peg their share price targets to DRAM/NAND spot prices.

Then there are those (myself included) who look at the potential of a great many products incorporating memory chips. The memory market is no longer limited to PCs, laptops, tablets and cell phones. The computerization of a great many things (autos particularly) will reshape the memory market dramatically.

I don’t believe that “Price is Truth”.

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I’ve followed Sauls approach for nearly a full year now. Did you read the article that I attached? You seem to think of it as just a hardware play. I think one could compare this to NTNX as having other forms of revenue growth other than hardware. In fact both rely little on Hardware these days.

I believe that it’s two new forms of revenue growth are not priced into the stock and that it’s got 15 bagger potential. Also that the revenue growth will continue to increase.

Any thoughts on where Roku and other Saul stocks fit into within the 40 rule currently?!

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https://www.fool.com/investing/2018/11/18/7-metrics-highligh…

Platform revenue increased 74%
Roku’s platform revenue, or revenue primarily from advertising sales and from subscription and transaction revenue share…More than two-thirds of platform revenue came from advertising

My concerns are highlighted here

Rokus growth is one of convenience, not a moat, not loyalty, but a first mover growth.

Subscription service isn’t creating stickiness or leading the growth.

Hardware company

Trade Desk is my play into Roku or any other platform in the future (Amazon, Apple, or one day… Samsung, LG, Visio…what’s to stop it?)

Just my thoughts and approach into the streaming plays. Haven’t been convinced otherwise yet.

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“Here is the problem I have with Roku (I own 4 Roku devices, having just bought the Roku Ultra for 4K UHD streaming - so I love their devices. Also have 1 Apple TV so know how good that works as well”

I think the bigger problem is that you own 5 TVs if my math is right. :wink:

Either that or you live in one heck of a big house.

Chris

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I think the house is perfectly sized, thank you :blush:.

But indeed there are multiple areas of entertainment and leisure that are quite distinct and thus requiring visual entertainment. However, one day, the VR will turn into the universal TV (in fact you can already watch a 150” VR screen on your Vive VR if you want. But that is another story).

Having given Roku some more time to ponder there are a few other reasons for concern that I have. First, its gross margins over the last 4 quarters have varied from 39% to 51% and the trend is mostly worse. Supporting my point that much of their reported revenues (like Nutanix had with their revenues) is waste revenues as it comes from sales of product that produce little in regard to gross profit. Similar to Pivotal’s service revenue (which is probaly higher margin than Roku hardware sales). Thus Roku is actually not as cheap as the price to revenues indicate because material revenues are less than 100% of their revenues.

Second, with my experience using Roku, most of the ad value (and now premium subscription content that pays Roku) is contained within the Roku channel. Thus a good chunk of the value for Roku is how well the Roku channel does. The Roku channel competes with all the other channels that are on Roku like Netflix or DirectTV now or Hulu or the like. So there is a conflict of interest there, but don’t know if it is material one or not.

But point being, who here is an avid user of the Roku Channel? I now watch in 4K UHD as much as possible, and I believe Roku channel, the one time I watched something on it, was much lower resolution. This turned me off to it. Something Roku may have already improved on or not, I don’t know.

But it is here, the Roku channel, where most of the Roku ads will land (they offer free movies like Matrix or some more recent fair, but certainly not up to HBO snuff). This is also where they will sell premium channels like Showtime and HBO and take a cut.

Other than this they have banner ads on the home page of Roku.

IT seems to me that an investment in Roku is an investment in the Roku channel. I do not believe the Roku channel to be worth $10 billions of dollars or the like, and there is nothing special about it per se. But perhaps others see it differently. I do not wish to invest in the Roku Channel for a company with low 40% gross margins, in a highly competitive business, that is subject to being disrupted, that is already valued at more than $3 billion.

If anyone knows where else Rokue will derive their primary value other than the Roku channel, please let us know. Sure, they have other areas to monetize, but from my use of the devices I do not know where else those would be outside of the Roku channel.

Tinker

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There are three big ways that Roku makes money. One, through the sale of streaming devices, which is a lumpy business with scanty profit margins. Two, through paid streaming subscription revenue shares, which is a steady, annually recurring business with huge profit margins. Three, through the sale of digital ads, which is also a steady business with huge profit margins.

For me, I prefer to invest in companies that were/are/will be the leaders in those categories:

Hardware: NVDA/ANET
Streaming Subscription: NFLX
Ads: TTD

Roku does not seem like a leader in any of those, but very well may be a good investment from here, I don’t know.

What I do know is I’m more confident in the companies I’ve listed going forward.

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In 2018, I was in Roku at 39. Stock surged up to 77 and came crashing down (I sold at 44 on the way down) to as low as the mid 20’s. Very volatile stock. My problem with Roku is that they depend too much on promotional dollars from companies like Netflix to pay them what some call the Apple tax. Netflix was paying millions of dollars to Apple for Apple TV owners who signed up for Netflix on their platform.

Now Netflix is changing their policies to have Netflix subscribers sign up on their website and scaling back on paying the Apple tax. Roku will definitely collect these fees when companies like Disney start their streaming services. But sooner or later that revenue will be taken away from Roku as the low hanging fruit is picked.

What one needs to watch is how compelling their exclusive content will be ala Netflix but possibly running on ads and how many people watch this content. Roku tax money is not sustainable. This is a trading stock until this thesis plays out.

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Roku up nearly 40% in two sessions. Shoulda trusted my gut as it was a screening buy atleast until it doubled.

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Thoughts on Roku?

The problem I have with Roku is that with the advent of the “Smart TV” nobody needs a Roku anymore. I don’t think you can even purchase a TV now that does not have streaming functionality built-in.

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…the advent of the “Smart TV”…

Likewise, my cable box (Comcast Xfinity) has support for Netflix and Amazon streaming built in. No need to swap remotes.

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The problem I have with Roku is that with the advent of the “Smart TV” nobody needs a Roku anymore. I don’t think you can even purchase a TV now that does not have streaming functionality built-in.

Understood, but some TVs have Roku built-in. I have a smart Samsung TV, but I deplore the user interface. Consumer electronics companies, for reasons I fail to understand, have no idea how to design a UI. (And don’t get me started about my 2016 Odyssey…) That is where my Apple TV shines. Dead simple to use. Gives me access to all the content I care about (except Spotify), including the kiddo’s TV channels. As well as our iTunes purchased content and rentals.

About that last point, Apple is now going to let Samsung smart TVs also get to iTunes purchased content and rentals. I heard Roku will follow suit. This is good for Roku, but I also see it as good for Apple. If they really want to sell more services it cannot only be via their own HW.

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The problem I have with Roku is that with the advent of the “Smart TV” nobody needs a Roku anymore

When I was visiting my parents over Thanksgiving, they had a new SmartTV and an older Roku. I forget the TV brand now but the interface of using Hulu and Netflix was horrible. One issue we had with the older Roku is that it didn’t seem to support Hulu’s local channel and sports function that they now offer as well as didn’t support 4K. I ended up getting them a new Roku as it is just easier and a much better interface.

I do think Roku needs to be more aggressive and license the software out to TV manufactures instead of them doing their own development.

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Understood, but some TVs have Roku built-in.

25% of U.S. TV sales, at this point…

FWIW, here’s a write up I recently did on Roku:

Roku isn’t the hardware, OTT TV box company you may have thought it was. It’s a content distribution platform, through apps and the Roku Channel. It’s the #1 streaming platform by hours streamed. A trait that shouldn’t go unnoticed by Fools. They continue to grow market share by adding depth to its increasingly popular channel. Roku Channel started in September with entertainment like movies and TV shows, and now has added news, with new content categories reportedly coming. CEO Anthony Wood states their intent as “…the Roku Channel is the sandbox where we are building up our expertise in content-first UIs [user interfaces] and recommendations.” They are growing their brand by focusing on their platform strengths, including ease of use, value and content selection. The Roku Streaming Stick Plus was recently named the Best Streamer Overall for 2018 by CNET. Here is the Editor’s Choice review:
https://www.cnet.com/reviews/roku-streaming-stick-plus-revie…
Importantly noted here is that Roku is kind of the Switzerland of streaming hardware. Regardless of the streaming service, Roku can successfully be the platform of choice. As noted in the review, “Its dead-simple interface puts every streaming service on a level playing field. Roku has more 4K HDR apps and better search than competitors.” They sell the streaming players, and license with TV manufacturers to have the software built in. The holiday season should be a nice boost to customer growth, as we know the switch to streaming is ongoing. We see media behemoths like Disney, Comcast and AT&T driving their content toward streaming, and Roku is there to distribute that content. With the Roku Channel, Wood’s vision is for this ad supported, free channel to be the aggregate of the many niche streaming services and apps. As he states it, “If you’re a content owner you can publish your content directly on the Roku Channel.”

All that is simply the base for the market that is fueling its growth and where the potential lies – advertising. 10% of the 18-34 year old demographic is now streaming through Roku. Advertisers are going where their demographic goes. Two thirds of Roku’s platform segment is advertising, and the segment grew 74% in Q3, compared to Q317. Video ads grew by 100%. Most of their gross profit flows from advertising to the platform segment. Ads are a $70B business in the U.S., and streaming ads have the advantages of being targeted and measured with data analysis. This is an arena that should be familiar with Fools. They see growth in ways like the targeted ads being sequenced. Like a multiple part TV series. If a viewer is targeted with ad #1, they can then show them ad #2, #3, etc in a series. They recently launched a Measurement Partner Program with 11 partners that includes Nielsen, comScore, and Experian among others. This gives companies a standardized way to collect data on store and website visits, and sales results. It’s the digital version of marketing attribution, and this “Justice League of research companies”, as they call it, will give advertisers a level of data and a way to track metrics that no other platform offers. Ad capture is growing as advertisers know it’s working by tracking and finding better ROI. The real streaming ad growth is still to come, as there’s a lag from when viewers move. As with the switch to mobile, it should take a few years for the ad spend to catch up to the viewer growth.

As far as business financials go, Roku has been public for 5 quarters now, and their recent Q3 results beat estimates for the fifth time. Active accounts grew 43% to 24 million, yoy. While traditional pay TV lost 1M subscribers, Roku gained 1.8M active accounts, sequentially. Total net revenue grew 39% and gross profit 58% in the most recent quarter, versus last year. The company expects Q4 to see 38% net revenue growth, and 45% gross profit growth, based on the midpoints of their estimated ranges. They ended Q3 with $180M in cash/equivalents and no debt. They also raised their full year 2018 outlook, seeing revenue growth of 42% (previously 40%, which was up from 31% at the beginning of the year), and 63% gross profit (up from previous quarter outlook of 61%, and 43% at the beginning of the year). So clearly, their growth expectations have accelerated in 2018. They estimate that 25% of smart TV’s sold in the US this year will be Roku TV’s, up from about 20% last year, and 13% in 2016.

While ROKU has still shown strong price appreciation since it’s IPO, it has retreated from it’s September high of $73 to approximately $40 during this recent market correction. While it may still seem overvalued by traditional metrics, that’s not something that should keep Fools from seeing the growth and the potential long term opportunity. ARPU has been growing each quarter since they went public, and is up 37% since then as of Q3. That’s a business model of an ecosystem that worked pretty well for the likes of Apple and Amazon.

Howard
Long ROKU options position.

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