The stock market’s crazy COVID-19 swings have wreaked havoc with share prices for many companies, wrenching through an extended, excruciating roller coaster. But few companies have seen the kind of bouncing that’s hit Roku, despite what should be its perfect pandemic positioning.
A quick look at the company’s share prices the past year can induce vertigo, lurching from a high of more than $176 a share last fall to a bottom in mid-March, days after the United States began locking down, of barely $58, a nauseating 3X swing.
Amid what should be good news for the company’s markets and opportunities, Roku shares since then have only partially recovered previous heights. Over the past month, prices mostly oscillated between $114 and $137 or so.
One example of Roku’s ups and downs: May 14, when the market rallied strongly despite difficult news on unemployment numbers and China trade fights. The Dow rose 377 points; Nasdaq 80.
But alone amid major media and tech stocks, Roku dropped 96 cents a share, nearly 1%, to less than $117. The proximate cause: Roku said it will issue up to 4 million more shares, diluting existing owners’ holdings.
There’s certainly plenty to celebrate for the company, given its heavy use by millions of suddenly self-isolating households in the United States and some other markets.
During the first three months of 2020, Roku said users streamed a record 13.2 billion hours, up nearly 50% from a year ago. Viewing in April, the first full month of lockdown, was up 80%.
Active Roku user accounts increased by 2.9 million in the first quarter, reaching 39.8 million.Revenue for Roku’s ad-driven “platform” business increased 73% year over year to $232.6 million. Revenue for the hardware side of the business spiked 22% to $88.2 million.
Two-thirds of analysts following the company rate it a buy, and even moderate skeptics such as Guggenheim’s Michael Morris say the company is well positioned. At the same time, however, Morris downgraded the stock to neutral (at a $120 target) and noted its sector-topping 53X multiple on projected 2023 earnings. For comparison, Netflix, where Roku founder Anthony Wood developed his first streaming device, is trading at 5X, and enjoying record share prices.
"We expect advertisers and investors will view (connected TV) as a secular growth business for an extended period as linear-television ratings continue to erode, and more ad-supported content is made available via streaming,” Morris wrote. "Given Roku’s significant, direct exposure to this business, we expect investors to view the company as a secular winner.”
By that, he means Roku almost can’t help succeeding, given its strong position in the U.S. market in sectors destined to thrive. But Roku is having to share that opportunity with an increasing number of deep-pocketed competitors.
At CES 2020, Amazon reported that it had 40 million Fire TV users, just slightly ahead of Roku’s reported numbers. Together, their roughly 80 million U.S. households represent 70% of the U.S. connected device market.
But there are reasons for concern about Roku’s growth prospects.
First up is the list of competitors selling stand-alone streaming devices, “sticks,” and operating interfaces for smart TV. The list includes Amazon, Apple, Google and Samsung, which all have valuations that dwarf Roku.
In turn, that competition limits Roku’s international prospects. Kagan says Amazon Fire outsold Roku in overseas sales, 3.9 million to 2.6 million devices. While Roku is available in several major international markets, it has nothing close to the global reach of Amazon or Apple.
And while Roku has relationships with value-priced connected-TV makers Hisense and TCL, it’s unlikely to significantly penetrate China’s giant market, given that government’s preference for homegrown media-distribution solutions.
Add to the competitor list Comcast, which just announced that it has given away 1 million of its Xfinity Flex streaming devices to new broadband customers since announcing the product last fall. The giveaway is worth it for Comcast, because it can now market to those users products and services such as its Peacock streaming network (which debuted last month for all of its cable broadband subscribers ahead of a broader July 15 launch).
Perhaps just as significantly, while Roku devices are optimized for a sleek and friendly video-streaming experience, they aren’t as capable when it comes to a rash of new use cases, from managing smart home devices to playing games, virtual reality experiences and more. Apple, for instance, touts its $4.99/month Arcade game subscription for use on Apple TV as much as iPads, iPhones and Macs.
Google and Amazon are also getting into gaming in a big way, and lead the smart home/smart assistant race too. Roku has no part of any of that.
There are even reasons to question the company’s success with its free Roku Channel, a big strategic focus given the significant ad and subscription revenue it generates.
Like the other free, ad-supported TV services out there (Tubi, Xumo, Pluto, IMDb TV), the Roku Channel features thousands of hours of shows you may have seen before somewhere else, from The Waterboy to Driving Miss Daisy, and My Favorite Martian to Duck Dynasty. It also enables the company to showcase and sell premium channels such as HBO Now and Showtime, for which it takes a cut.
Roku’s generated $528 million in ad revenue in 2019, up 82% from the previous year. But in the company’s latest earnings call, executives said the general weakness in ad markets is affecting Roku, too.
The channel store faces more subtle challenges. HBO Max, for instance, is set to debut on May 27. Much attention has been paid to comments made by AT&T’s soon-to-be CEO, John Stankey, that HBO Max won’t launch on Amazon Fire TV.
But notably, AT&T hasn’t announced an app for Roku, either.
This is possibly because AT&T/Warner Media wants to drive viewers to its standalone app, where it can keep to itself all the audience data, relationships and other valuable assets, as ,
“Will Roku allow HBO Max to offer an app on Roku devices, if HBO Max does not allow its Max exclusive content to be part of the Roku Channel…” LightShed analyst Richard Greenfield wrote. “For channel platforms, allowing HBO to effectively exit channel stores essentially spells the beginning of the end to a one-stop destination for streaming content…That’s a problem for Roku, given that its channels are a big part of the one-stop shopping appeal of the Roku Channel.”
And—this is important—Roku still isn’t making money, despite all the audience usage. It reported a net loss of $54.6 million in Q1, on $321 million in revenues. The good news is revenues rose 55% compared to 2019, and exceeded analyst expectations.
Roku executives said they are in good position to get to profitability, especially when the economy recovers and ad spending kicks back in. But even now, Roku says buyers will shift increasing amounts of ad spend to streaming platforms as they look for value in a bad economy.
“While advertisers are spending less, reduced budgets mean marketers are looking for ways to invest more effectively and this should accelerate the shift to streaming ad buys,” Roku CEO Wood said.
It may be that, long term, Roku can find a sustainable perch as a niche player riding demand for good video-streaming experiences that aren’t integrated into one of its giant competitors. But Roku shareholders likely will continue to face a wild ride as the company competes amid giants in an uncertain new world.
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