ROKU

Investment Analysis Clubs Saul’s Investing Discussions
1

I started a position in ROKU earlier this year.

I see:

-growing TAM as more TV is consumed digitally and on demand, cable cutting grows
-platform revenue, active accounts, streaming hours, rev. per active account growing nicely
-leading independent platform for digital TV consumption
-being built into smart TV’s gives platform advantage

Unfortunately, I sold my position before the last earnings report for 2 reasons:

  1. Amazon/apple/google are starting to play nice with each other, letting each others apps back on their respective platforms. I see this as reducing Roku’s competitive advantage of being an independent platform

  2. ROKU is dependent on the smart TV makers to continue putting the ROKU player into their smart TV’s

My main concern is #2. I think ROKU’s success is dependent on their ability to have their technology in the smart TV’s. So far so good since they have about 1/3 of the smart TV market and growing. However, I don’t like that (to me) their future is highly dependent on what the smart TV makers decide, somewhat out of their control.

What if smart TV makers cut them out? What is the incentive for the TV manufactures to keep ROKU? What if they switch to using google/apple/amazon tech in their TV’s?

Looking for other opinions on the likely hood that ROKU continues to be in and grow its tech in smart TV’s.

Thanks,
Jim

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2

My main concern is #2. I think ROKU’s success is dependent on their ability to have their technology in the smart TV’s. So far so good since they have about 1/3 of the smart TV market and growing. However, I don’t like that (to me) their future is highly dependent on what the smart TV makers decide, somewhat out of their control.

From SoonerAJs recent post:
2017 - 1 in 5 Smart TVs sold in the US comes with Roku TV
2018 - 1 in 4
2019 - 1 in 3

Completely valid concern - but the trend is clear, more and more TV manufacturers are embedding Roku OS.

It’s razor and blade. Selling cheap product (product rev +18%, unit sales +21%) w/ paper thin gross margins (2%!), giving them rising user count (+44%!!) with rising ARPU (+27%). Those users are watching more (+74% streaming hours) which means more ads delivered (platform rev +79%).

My earnings notes:

ROKU - Q119
https://www.fool.com/investing/2019/05/09/roku-soars-to-all-…

Danny thoughts: https://www.fool.com/investing/2019/05/09/4-reasons-roku-soa…

Revenue 206.7M +51%
Platform Rev 134M +79%
Player Rev 72M +18%
Loss -9.7M
EPS -0.09

Player unit sales +21%
Player ASP -4% (aggressive pricing)

Active Accts 29.1M +40% !! (Comcast 22M)
Streaming Hours 8.9B +74% ^^
ARPU 19.06 +27%

  • premium subscriptions added for HBO, Showtime, etc. can be managed thru Roku acct. Disney+ and Apple TV+ coming.
  • muji
    long ROKU (3%)
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3

I was able to find a couple more years of info.

% of smart TV’s with ROKU

2015 0
2016 13%
2017 20%
2018 25%
2019 33%

This looks good so far. If they become the default OS for the smart TV, its a stock I want to own.

With all new TV’s being smart TV’s, I thought the hardware sales would drop off. Hasn’t happened yet.

“Meanwhile, Q1 player unit sales were up 21% year-over-year.”

One concern I have is the trend in the ARPU.

last 5 quarters of ARPU growth rate:

50%
48%
37%
30%
27%

Not sure why the growth rate is falling. ad saturation? The rate of deceleration does seem to be slowing.

The trend in active accounts and streaming hours look great.

Jim

4

Today they announced a secondary offering of 1 M shares.

https://seekingalpha.com/news/3464514-roku-will-offer-1m-sha…

And last quarter they sold shares during the quarter at market prices:

From last quarter shareholder letter:

“We ended the quarter with $290 million of cash, cash equivalents, restricted cash and short-term investments which included net proceeds of $98 million from the sale of Class A common stock in at-the-market offering transactions during the quarter.”

Jim

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