Having owned it since last May, I might have a thing or two to say about Roku.
It’s been quite the roller coaster ride and a tough 2020, but I’m still on board. I’ve commented on it in every recap and included them all below. I’d recommend checking out a lot of the links, especially coming off my August recap. That 55-post thread was mostly about Roku, and most of it still applies. My main take in that thread is here: https://boards.fool.com/wow-go-away-for-half-a-day-and-a-gre….
All that being said, I can’t hold a candle to the work Darth has done on Roku (many of my links are to his info). Any search for Darth/Roku on this board is almost certainly worth a read. One point I’d make that I don’t believe has been referenced yet is Roku is the OS for roughly 1/3 of ALL smart TV’s sold in the US during 2019. They’ve now started to branch out into other countries as well. Given all the streaming happening in the world right now, I’m really curious to see next month’s report.
May 2019 – A new purchase. Roku has put itself smack dab in the middle of the seemingly unstoppable transition from linear TV to digital streaming. The platform and customer base they have spent the last decade building is ready-made for content providers looking to reach an ever-growing digital audience. A brief discussion of some of their numbers was posted in this thread started by SoonerAJ: https://boards.fool.com/roku-from-hardware-to-platform-34206…. My key takeaway after breaking them down is that Roku has evolved from a fancy cable box maker into a legitimate advertising platform with the potential to be the operating system for the majority of smart TV’s. The company’s higher margin Platform business – ads, smart TV OS licenses, and fees from its aggregator Roku Channel – is accelerating and becoming an ever larger percentage of total revenues:
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 2019 78.7%
Platform Rev % Total Platform Gross Margin
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 36.4% 46.1% 46.1% 45.4% 43.9% 2017 77.1% 74.4% 77.3% 74.6% 75.7%
2018 55.0% 57.6% 57.7% 54.9% 56.1% 2018 71.1% 69.8% 70.5% 72.2% 71.1%
2019 64.9% 2019 69.9%
At the same time, their customer base grows steadily and the time spent on their platform is exploding:
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 2019 39.9%
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 8.9 2019 74.5%
Roku’s self-described “strategy of trading player margin for account growth and platform revenue growth” appears to be paying off in spades. With 1-in-3 new smart TV’s running Roku’s operating system, they’ve passed Samsung as the #1 OS in the US. In addition, they’ve established a presence in 20 different countries. While they don’t expect any international contributions until 2020, their belief is the entire world will eventually move in the direction of digital consumption. That’s a whole lotta TAM goin’ on.
June – Roku briefly passed the $100 mark to set new all-time highs. It took a late dive when AMZN announced a two-day sale on its smart TV offering, but I personally view this more as FUD than any change in fundamentals or foreseeable business prospects. I might have considered adding if my allocation wasn’t already in my targeted range and everything else hadn’t dipped right alongside it. I don’t need to be a techie to understand that some people still dig watching TV and will likely access more and more of it through streaming platforms as we go. ROKU has put itself firmly at the forefront of that transition. I’m willing to let this story continue to play out.
July – I used some SHOP cash to nudge my Roku allocation ~.5% after a 15% decline due mainly to AMZN announcing a sale on its own featured smart-TV. Since Amazon wasn’t touting a new product but instead discounting a pre-existing one that hadn’t affected ROKU much previously, I viewed this as mostly FUD and added a smidge at $91.90 on 7/2. I originally decided against this purchase since I was already in my 5-7% allocation zone but changed my mind after I viewed the discount as too attractive to pass up and Roku touched the bottom of that range.
We’ve now experienced a couple instances where an Amazon announcement causes one of our holdings to temporarily dip before bouncing back to challenge new highs. January’s MDB wobble is probably the most notable example. AMZN’s Open Distro gambit against ESTC appears to be ending that way as well. I’m fully aware that a handful of cases does not indicate a trend, but ROKU’s price has thus far followed a similar path by rebounding 14.1% since July 1 while touching new highs along the way. While I’m glad the opportunity to buy the dip has worked out thus far, I view Roku’s August 7 earnings as a MUCH more important indication of its future. Stay tuned…
August – Roku reported on 8/7 and I thought they knocked it out of the park. Revenue growth accelerated to its highest level since their 2017 IPO. The last four quarters are now 38.9%, 46.5%, 51.3% and 59.5%. Even more impressive, growth in their higher margin platform revenues has trended the same way – 73.9%, 77.2%, 78.7% and 85.6%. GAAP margins remain slightly negative as they focus on growth, but Adjusted EBITDA has now been positive for 5 consecutive quarters. Roku now has 30.5 million active accounts (+38.6%) that collectively streamed 9.4 billion hours (+70.9%) last quarter. The company is clearly finding ways to monetize those hours as average revenue per user jumped $2.00 sequentially to $21.06. In addition, the company highlighted the following in their shareholder letter:
- Roku is the #1 streaming platform in the US by hours.
- Roku’s operating system powers 41 million devices and smart TV’s in the US. This is 36% greater than their closest competitor and is expected to grow.
- Roku owns 39% of the US streaming media player installed base as of 1Q19.
- Roku’s operating system powers more than 1-in-3 smart TV’s sold in the US during the first half of 2019.
In a nutshell, Roku appears to be delivering in spades. The company is out in front of a huge shift in the way viewers consume TV, and its rapid growth doesn’t look like it will slow any time soon. This recent thread contains a pretty good description of what’s going on: https://boards.fool.com/roku-thoughts-34281655.aspx?sort=who…. As for the stock, I was able to grab some at $105.50 immediately after earnings, then added a couple more lots over the next few days. At the time those buys put Roku just below my target allocation of 9-12%. It has now solidly appreciated into that range. I really like what Roku is doing and can’t see myself exiting any time soon. Given the numbers, I’m mildly surprised more here don’t own it and would be curious to hear why others have chosen to pass. What is it that’s keeping you away?
September – September (-32.8%) was a brutal month for ROKU after a ridiculously stellar August (+46.5%) that pretty much carried my portfolio. Being honest, the run from ~$100 on 8/7 to ~$170 on 9/6 was almost certain to elicit a pullback. As with any stock experiencing a similar burst, the question is always where the price finally settles. Unfortunately, in this case it settled just about where it started. Congratulations to anyone who was able to successfully trade in this window. I simply chose to ride it out since 1) I believe in the company longer term and 2) my ability to time the market has repeatedly proven to be terrible over the years.
Price action aside, there was quite a bit of news to digest during September. The first was an announcement that Roku has expanded its TV licensing program to Europe with Hisense as its initial European TV partner (https://ir.roku.com/news-releases/news-release-details/roku-… and https://techcrunch.com/2019/09/07/roku-expands-its-tv-licens…). Hisense was one of Roku’s early North American partners, so this seems like a natural expansion of an already successful relationship. The first Hisense/Roku TV’s will hit showroom floors in the UK during Q4.
The next pronouncements were the release of new and updated hardware. Early in the month Roku released a smart soundbar and wireless subwoofer that are both embedded with Roku’s platform (https://ir.roku.com/news-releases/news-release-details/roku-…). Mid-month the company released its refreshed lineup of Roku players and OS for smart TV’s. The pessimist in me sees this as a further expansion into hardware, which I’m lukewarm about. The optimist in me sees yet more avenues for viewers to easily access Roku’s platform, and as luck would have it just in time for the holiday shopping season! The pragmatist in me – who I always try to heed most often – is perfectly content to stick around to see how things shake out as Roku aggressively pursues what it clearly sees as opportunities for continued growth.
The third bit of news was AAPL’s unveiling of pricing for its Apple TV+ product. This led an already skittish market to dump pretty much every stock associated with streaming in any way. Frankly, Apple’s forays into these types of services never quite seem to pan out the way they’d like, so I’d say there was considerable FUD in the market’s reaction. It’s not like Apple created a new device to compete against Roku, and its own release said “The Apple TV app…will come to Amazon Fire TV, LG, Roku, Sony and VIZIO platforms in the future.” So Apple basically stated it was releasing a new service for a pre-existing app and one of the main ways to access that service is through Roku. Isn’t that what we want? I see nothing wrong with letting everybody else split up the content pie while Roku serves as the aggregating platform that pulls it all back together for easy access by consumers. The market reaction reminded me of the dip a couple months ago on AMZN’s smart TV flash sale, which turned out to be a great buying opportunity. I thought ROKU’s 10% haircut on the Apple news was a bit excessive, so I added about ~1% more at that level.
The final volley was Comcast and Facebook both releasing streaming options to existing customers on 9/18. This is the one that started the real hit to Roku’s stock. Comcast is offering its internet-only customers – a quick search turned up ~27.6M of them – a free first OTT box with a monthly charge for any additional boxes. Given those customers must rent Comcast’s modem to qualify and can only outfit one TV without seeing their bill increase even more, I can’t see this being a game changer. Facebook’s offering will be $149 and have streaming capabilities as well. As with the Apple announcement I’m not surprised others want a piece of the rapidly growing streaming market, but I don’t view either of these moves as disrupting Roku’s short-term prospects or overall business given Roku’s continued advantage of being a neutral platform in the streaming arms race. Sadly, my lack of time travel skills prevented me from cancelling my purchase on the AAPL dip so I could take advantage of this one instead. I believe those who added here will eventually be rewarded (although you’re on your own if it turns out I don’t know my ass from my elbow).
My sincere thanks to everyone who chimed in on ROKU after last month’s write up. This recent thread is useful as well: https://boards.fool.com/roku-competitors8217-strategies-3429…. And a special shout out to Darth for an excellent post on the state of the overall streaming market (https://boards.fool.com/q2-2019-state-of-streaming-tv-342866…) along with a list of the current best-selling TV’s on Amazon (https://www.amazon.com/Best-Sellers-Electronics-Televisions/…). [Spoiler alert: Roku dominates in both links.] Darth’s been on an extremely informative Roku tear the last few weeks.
After some pretty lively discussion, I remain convicted in my Roku thesis. I also better understand the bear case, which is always helpful and should not be underestimated. For now I will continue to hold Roku as a healthy part of my portfolio, though I’m guessing that’s easier for me than some others since a large number of my shares still sit in the green despite the recent pounding. At the same time I’ll be watching the next couple of quarters closely to make sure the expanding competition isn’t hurting Roku’s margins or prospects for future growth. This is a case where I’m not trying to overthink things. I’m intent on owning the company until the growth and platform revenue numbers tell me it’s not worth following any longer.
October – LAAAAY-DEEEEEEES AND GEN–TLE–MEN! DON’T BE SHY!! STEP RIGHT UP TO THE ROKU ROLLERCOASTER!!!
Whoa. This is the exact opposite of drama-free. The stock’s exhilarating August (+46.5%) and vomit-inducing September (-32.8%) have now been followed by a thrilling +44.7% October. That means Roku has basically carried my portfolio for two of the last three months and has now leapt to my top spot as a result. While the company’s November 6 earnings should no doubt be interesting, those results are likely just a prelude for what has traditionally been HUGE seasonality during the Q4 holiday season. That’s when we should really see just how well Roku has positioned itself as the default OS and viewing platform for the ever-increasing number of eyeballs migrating to streaming TV. For those who have dared to enter this ride, please check your safety bar and remember to keep your arms and legs inside the car at all times. The rider assumes all risks and no refunds will be given.
November – Face it people, ROKU is a volatile little scamp. The company reported good numbers on 11/6 with small beats in several areas and a FY raise. Active accounts and streaming hours continue to climb, with Roku now serving 32.3M users who spent 10.3 billion hours on their platform last quarter. Average revenue per user (ARPU) climbed sequentially from $21.06 to $22.58 and ARPU growth accelerated to +30.2% YoY. This tells me they are clearly finding ways to monetize their eyeballs. Operating expenses climbed a tick, but they do not appear to be overpaying for the growth they are creating. And despite guiding all year toward breakeven EBITDA they are likely to end up closer to +$35M when all is said and done. On the whole I believe Roku continues to deliver on its promises with plenty of room to continue outperforming.
Unfortunately, a finicky market for highfliers didn’t seem to immediately share my opinion. The stock dropped ~15% after hours, which wasn’t a shock to me considering the smoking hot ~40% rise the month or so leading into the report. I’m also not surprised it has rebounded quite nicely as the news has settled in, even with Roku announcing a very small secondary offering mid-month to help cover a recent acquisition. I’m perfectly happy with the results and believe Roku has lined itself up well heading into its seasonally large Q4. Ultimately, their stated plan of “trading player margin for account growth and platform revenue growth” appears to be very much on track, and a strong holiday season in smart TV and/or player sales could fuel continued hyper growth in platform revenues during 2020. Their recent release of Roku TV’s in the UK should help in that regard (https://ir.roku.com/news-releases/news-release-details/hisen…). A reasonable Q4 beat would have Roku exiting 2019 as a 50%+ overall grower with >$1.1B in revenues and plenty of tailwinds behind it. I trimmed ~.5% just before earnings while rebalancing accounts after last month’s TWLO sale, but have no problem keeping the remaining shares as one of my largest positions.
December – I used my regular monthly contribution to add a teeny amount when Roku opened December down ~15% on a Morgan Stanley downgrade with a $110 target. Of course, a Needham analyst sent the stock up the very next day with an upgrade that included a Street-high target of $200. That’s quite a difference of opinion. I’m siding with Needham on this one since I make a point of never trusting anyone with two first names (my apologies to everyone out there with two first names). Here’s hoping the bulk of this holiday’s smart-TV upgrades end up powered by Roku’s OS.
January – Roku kicked off the year with three interesting pieces of news. The first was an announcement that 15 brands will be rolling out Roku-powered TV’s in the US, UK, Mexico and Canada during 2020 (https://ir.roku.com/news-releases/news-release-details/roku-…). Those brands now include ATVIO, Element, Hisense, Hitachi, InFocus, JVC, Magnavox, onn., Philips, Polaroid, RCA, Sanyo, TCL and Westinghouse. The second was a release detailing a new verification program which “allows third-party consumer electronics products to work seamlessly with Roku TV’s” (https://ir.roku.com/news-releases/news-release-details/roku-…). These products will be specifically labelled “Roku TV Ready” on packaging and marketing materials to identify they are certified to work with Roku’s operating system. This will “make it super easy to setup and control soundbars and audio/video receivers using just a Roku TV remote”. Finally, the company expanded its long-awaited international push by debuting its platform in Brazil (https://ir.roku.com/news-releases/news-release-details/roku-…). This includes an OS deal with TV manufacturer AOC as well as a content partnership with Globoplay, Brazil’s largest streaming service. This deal potentially benefits all involved, and Globoplay will be prominently featured with a shortcut button on Brazilian Roku remotes in the coming months. I like this move and view local partners as a smart, measured way to increase the odds of a successful rollout.
Unfortunately, these positives were overshadowed by a piece of negative news just this morning. It appears Roku and Fox are in a contract dispute which caused Fox’s apps to be removed from Roku just two days before the Super Bowl (https://adage.com/article/special-report-super-bowl/super-bo…). Even though both companies supplied alternatives for accessing the game, it’s not a good look for either before such a premier event. While fee disputes between carriers and content providers are fairly common in the cable world, this looks like the first major disagreement of the streaming era. Considering the unrelenting shift of viewers from cable to streaming, it almost certainly won’t be the last. As with most of these squabbles I’d expect an eventual resolution reestablishing the partnership. In the meantime, I view this drop as FUD and nibbled at another ~0.4% this afternoon. Welcome to the big leagues, Roku. Please be smart and don’t overplay your hand.
The end-of-month stumble notwithstanding, I view the earlier pronouncements as excellent examples of Roku’s burgeoning popularity. The company is continually finding innovative ways to worm into more and more home entertainment systems. In addition, these releases suggest third parties are becoming quite eager to access Roku’s platform and customer base. The more the merrier as far as I’m concerned. Despite the stock zigging down 9.7% this month while literally everything else I own zagged higher, I have no reason to think the overall business or thesis has faltered. Roku’s 2/13 report on their traditionally large Q4 should go a long way toward clarifying just how well-positioned they are for continued success. I plan on holding tight at least until then.
February – And the volatility continues. After being my only market-trailing stock in January, Roku charged out of the February gate. It surged right away when Roku settled its Fox dispute and then continued to climb into midmonth. While the Fox agreement was certainly a welcome (and anticipated) development, I viewed it as nothing more than a prelude to a pretty significant earnings report on 2/13. The company spent most of 2019 very aggressively expanding its viewing platform and OS footprint. This report would shed some initial light on just how well those efforts had positioned the company for 2020 and beyond.
I personally thought things looked pretty good. Roku posted 49.1% total revenue growth with its higher-margin platform growth coming in at 71.5%. For FY19 those rates finished at 52.0% and 77.7%, respectively. Active accounts (+36%), streaming hours (+60%) and average revenue per user (+29%) all continue to grow at strong rates. Platform as a percentage of revenues has increased from 43.9% to 56.1% to 65.6% the last 3 years and is expected to be ~75% for 2020. Roku not only ended 2019 with its OS in roughly 1/3 of US smart TV purchases but also laid the groundwork for additional expansion into North America, Europe and Brazil. The call was confident, and I didn’t sense any unanticipated headwinds on the horizon. Finally, Roku’s top-end 50% Q1 revenue guide would mean sequential acceleration, and even a moderate beat would also be YoY acceleration vs 1Q19’s 51.3%. Accelerating 50%+ growth coming off a $1.13B revenue year? Sounds good to me.
Unfortunately, the market didn’t share my enthusiasm for very long. The stock initially spiked up ~8% at the open ( wistful sigh ) before crashing down to finish the day at -6.5%. And Roku’s been stuck in the mud ever since. The decline was apparently spurred by analyst concerns about the below consensus FY20 guide for breakeven EBITDA and GAAP losses, due mostly to integration of the dataxu acquisition. As a reminder, this is the very same EBITDA guide they made for most of FY19 before finishing at +$36M. Management has been very explicit about their growth intentions, and the returns have been positive so far. They state they are “well positioned for the new streaming decade”, and I can’t really argue that point. Given the guide and underlying metrics, it’s not hard for me to picture strong revenues and positive EBITDA in 2020…
…but what I see is only part of the puzzle. Despite believing Roku has an excellent plan, I must admit disappointment in the post-earnings action. The early month climb and initial earnings pop made sense to me (ownership bias maybe? https://en.wikipedia.org/wiki/Mere_ownership_effect). The subsequent action has not. That’s led to a bit of a gut check. While Roku’s been a profitable buy, I can’t ignore most of my position has basically been dead money for six months while trailing the market significantly. At some point that means something. Not because I’ve soured on the business, but because holding such a condensed number of stocks really highlights the effect of opportunity cost for any “wait it out” portion of your portfolio (https://www.investopedia.com/terms/o/opportunitycost.asp). I’m all for Roku’s continued expansion, and in theory their shift to maximizing platform revenues and ARPU should have some coiled spring effect once it kicks in. It obviously didn’t with this quarter’s earnings, so the challenge becomes determining the acceptable hold time and allocation for a stock that might stagnate further while I await signs of the payoff.
Being brutally honest with myself, I’ve previously found ways to trust NTNX, SQ, TWLO and ESTC’s numbers a little too long even though the market was telling me otherwise. Simply put, I don’t need to fight city hall when there are other options available. After all, I’m not here to prove the market wrong. My only goal is maximizing returns. Given that, I’m beginning to question how committed I am to ~10% of my portfolio potentially drifting for another quarter at least. I can’t see myself abandoning Roku since I still like the business very much, but it does enter March as a candidate for a lower allocation depending on my remaining earnings results.
March – There’s simply no sugar coating it. After being a portfolio standout through Fall 2019, Roku’s been a serious drag since. I spent most of February trying to figure out why since I thought earnings were fine and the overall thesis remains intact. In early March the price finally reached a point where I felt the market began to throw out Roku’s platform baby with the hardware bathwater. I think some of the initial hit was supply chain concerns for Roku TV’s and sticks, then it was compounded by concerns over ad sales. I also believe their international expansion might take a slight pause given the current climate. However, TV’s and Roku sticks are not where the money lies. They are just the gateways to eyeballs. Ads will decrease but won’t disappear, and streaming hours are very likely to skyrocket. Ad impressions through The Roku Channel should surge as well. I shook the couch cushions to add a tiny 0.1% in my taxable account when the stock dropped below $80. I know others have added as well. Despite Roku’s terrible YTD, I can’t see how there’s not room for considerable upside from these levels. With the shares this beaten down I see no harm in holding through early May’s earnings and reassessing. I’d expect some rebound with an even moderately optimistic outlook. If not, it’s likely time to move on. Hopefully people won’t decide to stop streaming television while they are on lock down between now and then.
My current April draft – The big news in April was Roku continuing its UK expansion with the British release of The Roku Channel (https://ir.roku.com/news-releases/news-release-details/roku-…). Like the US, the channel is free to viewers and supported by ads. The UK version features “10.000+ free movies, TV episodes and documentaries [including] a selection of popular global and British TV series” geared toward the local audience. I’m speculating a bit here, but Roku must have sensed a big enough audience and enough interest in their British ad inventory to proceed with the launch.
Maybe I’m just being stubborn, but I’ve held steady with my shares. The current global lockdown should only accelerate the move to digital media. Ad dollars eventually go where the eyes are, and right now the eyes are on streaming. Roku’s platform gives it optionality that TTD lacks while waiting for things to play out. I believe Roku is positioned to withstand the temporary decline in ad spending and come out stronger on the other side. My first chance to test that theory will be when Roku reports on XX. As stated last month I think even mildly optimistic news could portend a rebound. If nothing else, it should stop the recent bleeding and set some sort of base. I’ve got my fine-toothed comb ready for whatever info comes my way.