Roku’s Glory Days Could Be Approaching an Expiration Date
With its latest quarterly results, Roku is maintaining momentum and keeping investors convinced that the company is a clear winner of streaming adoption, the declining linear viewership of non-live content, and the launch of streaming services by a number of media companies. But the glory days for Roku might have an expiration date, according to MoffettNathanson analyst Michael Nathanson.
“Our feeling on Roku is pretty straightforward: the stock will continue to work in the near-term as their business momentum continues. Yet, there should be a point in time – we don’t know when – when these emerging worries start to become reality that pressures Roku's equity price.”
More than a 2-horse race: Roku is benefiting from its first-mover advantage, but analysts are proceeding with caution as they expect the competitive environment to get significantly tougher. Pivotal Research’s Jeff Wlodarczak, who has a SELL rating and $75 price target, says that “Our view is that at a $30B valuation ROKU is priced as if it is a 2-horse race with them and Amazon which we view as highly unlikely.” Meanwhile, MoffetNathanson’s Michael Nathanson, who has a NEUTRAL rating on Roku, says “It is impossible to ignore the wall of worry that is building for Roku” due to the upcoming competitive threats from the likes of Alphabet, Comcast, and Amazon.
Alphabet: Alphabet recently rolled out a new Chromecast with Google TV streaming device. It runs software that lets users browse shows, movies, and apps. At $50, it is designed to compete with Roku and Amazon Fire TV.
Comcast: Comcast and Walmart are reportedly in talks to develop and build smart TVs in a partnership that would see Walmart promote TVs running Comcast software, according to the WSJ.
Amazon: Considered the “2nd horse” in the race, Amazon is Roku’s top rival now. Amazon’s Fire TV streaming devices count more than 40 million active users as of January 2020. Roku just reported 46 million user accounts. According to Wlodarczak, “Amazon Prime/Fire is expanding advertising inventory freeing them up to be more aggressive on the up-front price point and potentially putting pressure on ad rates with more inventory once Covid effects are over.”
Earnings recap: Roku topped expectations for revenue, Platform gross profit, and revenue guidance. Roku has two operating segments, "Player," which is its hardware sales, and "Platform," which represents ads and other services. Strong growth in these areas over the last quarter demonstrates the strength in streaming adoption and the AVOD marketplace (ad-based video-on-demand).
Platform: Momentum with advertising revenue was evident in the latest quarter, with Platform revenues rising 78% year-over-year. Monetized video ad impressions accelerated 90% y/y as new ad clients more than doubled over the same period, with 97% advertiser retention from 2019.”
Player: Player revenue grew 62% compared to a year ago, fueled by player unit sales growth of 57%. Roku experienced net adds of 3 million vs. 3.2 million in the previous quarter, with Active Accounts increasing 42% over the last year. Engagement remained positive, with streaming hours growing 44% year-over-year.
