Wow. Go away for half a day and a great discussion on Roku breaks out. I also received a reply off board with someone’s reasoning for giving it a pass, so greatly appreciated. I’m clearly biased since I own the stock, but I’d like to add some thoughts to those already made. This isn’t meant to convince anyone to buy, hold or sell the stock. It’s only meant to clarify my thesis within the context of the current conversation.
First, I had a couple comments on the business plan as I view it.
Andy: What does Roku have that is different or a moat? It isn’t their OS because their are many OS’s and people do not care about that.
In a weird way the fact people don’t care might actually be somewhat of a moat. Other than the really small subset you reference that prefer Kodi, most consumers are indeed indifferent about their smart-TV OS. That indifference means those consumers who aren’t seeking out a specific OS have a 1-in-3 chance of buying a smart TV with Roku as the potential default for accessing their content. So the moat might not be the consumer, but rather the existing deals with manufacturers who have already committed to putting Roku’s OS in their product. This is where Roku’s neutrality helps them. What smart-TV manufacturer that doesn’t have its own OS would willingly want to install Samsung’s or Amazon’s when those companies are clearly direct competitors? In my opinion that gives Roku a definite edge. Someone is going to get the consumer’s money. Roku is putting itself in position to facilitate a boatload of those transactions.
Andy: I would say they are trying to be another netflix right?
I think that’s an interesting comp and it does makes some sense to me (others may chime in if they disagree). The difference I see is Roku isn’t stubbornly digging its heels in against an ad-supported free offering like Netflix. Roku is instead embracing that concept with the intent of monetizing their users however they can with no real preference whether it’s through subscriptions or ads.
Next, I had some observations on their numbers.
Andy: So while roku is putting up some great numbers right now, the one number that I do not like is it’s gross margins. They are sitting at 47% which is probably about average for a company that is building and selling devices but is not impressive.
12x: Roku’s device sales have actually been very lackluster. That’s not where their growth is comping from. This is not a “device” company like Fitbit. It’s an operating system company that monetizes it with free ad supported content.
I agree with 12x’s statement, and that’s a big part of my thesis for owning the company. As Andy points out, overall gross margins are pretty pedestrian. However, I view Roku more through the individual breakouts they provide. Their own stated strategy is “trading player margin for account growth and platform revenue growth". So how are they doing?
First, let’s take a look at the big picture through overall revenues and gross margin:
Net Revenue % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 $100.09 $99.63 $124.78 $188.26 $512.76 2017
2018 $136.58 $156.81 $173.38 $275.74 $742.51 2018 36.4% 57.4% 38.9% 46.5% 44.8%
2019 $206.66 $250.10 2019 51.3% 59.5%
Gross Margin
Q1 Q2 Q3 Q4 YR
2017 38.8% 37.8% 40.0% 39.0% 39.0%
2018 46.2% 49.6% 45.6% 40.7% 44.7%
2019 48.8% 45.7%
My Take: Accelerating revenues. Nice! To Andy’s point, overall gross margins make me a little less enthusiastic. So let’s dig deeper.
How about player margin?
Player Revenue % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 $63.68 $53.65 $67.25 $102.82 $287.41 2017
2018 $61.50 $66.47 $73.33 $124.34 $325.64 2018 -3.4% 23.9% 9.0% 20.9% 13.3%
2019 $72.51 $82.42 2019 17.9% 24.0%
Player Margin
Q1 Q2 Q3 Q4 YR
2017 16.9% 6.4% 7.9% 9.5% 10.2%
2018 15.8% 22.2% 11.5% 2.4% 11.0%
2019 9.8% 5.5%
My Take: Yuck. Player margin stinks! They’d better be trading it for something else or they are probably on the road to bankruptcy.
How about account growth?
Active Accounts (millions) % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 14.2 15.1 16.7 19.3 2017
2018 20.8 22.0 23.8 27.1 2018 46.5% 45.7% 42.5% 40.4%
2019 29.1 30.5 2019 39.9% 38.6%
Streaming Hours (billions) % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 3.3 3.5 3.8 4.3 14.9 2017
2018 5.1 5.5 6.2 7.3 24.1 2018 54.5% 57.1% 63.2% 69.8% 61.7%
2019 8.9 9.4 2019 74.5% 70.9%
My Take: Now we are getting somewhere. Roku has 30.5 million users streaming 9.4 billion hours. Roku is not only gaining millions of eyeballs each quarter but also seeing the time those eyeballs spend glued to their platform skyrocket. That’s a lot of opportunities to monetize their platform.
And finally, platform revenue growth:
Platform Revenue % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 $36.42 $45.98 $57.53 $85.44 $225.36 2017
2018 $75.08 $90.34 $100.05 $151.40 $416.86 2018 106.2% 96.5% 73.9% 77.2% 85.0%
2019 $134.15 $167.68 2019 78.7% 85.6%
Gross Margin
Q1 Q2 Q3 Q4 YR
2017 77.1% 74.4% 77.3% 74.6% 75.7%
2018 71.1% 69.8% 70.5% 72.2% 71.1%
2019 69.9% 65.4%
My Take: In my opinion this is where the real profit potential lies. Platform revenue growth is accelerating at VERY impressive rates, and gross margins are clearly MUCH higher in this area. What makes this development even more intriguing (to me anyway) is this:
Platform Rev % Total
Q1 Q2 Q3 Q4 YR
2017 36.4% 46.1% 46.1% 45.4% 43.9%
2018 55.0% 57.6% 57.7% 54.9% 56.1%
2019 64.9% 67.0%
As you can see, those higher margin platform revenues are rapidly becoming an ever bigger piece of Roku’s total pie. The company does indeed sell some hardware but only as a means to get more viewers on its platform. It’s the ads and extras Roku offers once those viewers are there that lead to the real money. I interpret Roku’s numbers as showing they are not only sticking to their stated strategy but executing it perfectly. I have no reason to think their business momentum won’t continue at least through the second half of the year, especially when you consider the potential accounts and hours they could add via people upgrading TV’s over the holidays. I can’t speak for everyone that holds Roku, but I consider the next two or three quarters must-see TV (very crappy pun totally intended). I guess that’s what makes a market.
12x: I’m obviously not here to change minds or convince people to buy Roku but that’s the way I see it.
Andy: I don’t have a dog in this hunt and maybe you will change my mind
To me this exchange exemplifies why this board is so great. I’m never looking to change anyone’s mind in these discussions. I’m only looking to refine my own thesis through the viewpoint of others. Everyone here is 100% free to make their own decisions on what to do with their money. There’s really nothing to “win” on an internet message board. Unfortunately, not everyone feels that way and it can often pollute the discourse to the point the entire board suffers. In my opinion that’s part of what splintered NPI and I believe the entire Fool community is worse because of it.
In its purest sense Roku is only a dog in my hunt while I choose to own it. That’s the only connection I have to the company. I’m not here to stump for technologies, gardens or brands. I’m only here to find stocks I think can maximize my returns until a better option comes along. I don’t own a Roku device or TV and don’t plan on it. I’m simply choosing to own a part of what I believe is a successful business at this point in time. It’s discussions like these that help guide my decisions and I appreciate the thoughtful yet civil way we continue to break these things down.
Andy: … keep a sharp eye on it.
Very sage advice, my friend. I promise I will.