Consumer technology is full of booms and busts. In such a fiercely competitive industry, when technological disruptions that could up-end an entire industry virtually overnight, returns for a longer-term investor are about a company’s staying power.
Trading on brief share pops, fueled by public interest can also be a profitable strategy but for many companies those pops are short-lived.
The ride downhill often lasts much longer, especially for those who hung on too long.
Companies need to have the right mix of industry tailwind, innovation, and profitability (or potential to get there) in order to win the long game. Here are three stocks that make the cut and three that don’t.
Consumer Tech to Buy: Roku, Inc. (ROKU)
With the broad mission “to be the TV streaming platform that connects the entire ecosystem,” Roku, Inc.’s timing could not be more impeccable. From the industry side, interest is high in tech companies that have a footing in home entertainment, which is where the trend will continue to skew — away from theaters and toward in-home and whatever time the viewer wants. From the company side, the things investors want to see like user growth and streaming hours all have significant momentum.
Since 2012, annual streaming hours have not just doubled or tripled but increased 13x (based on TTM 2017). Looking at more recent streaming figures, a sign of user engagement, for the first half of this calendar year, hours stream increased 62% to 6.7 billion hours. ROKU is capturing more and more eyeballs in an increasingly competitive OTT environment.
And importantly, beyond just capture more viewers, ROKU is constantly improving monetization. Average revenue per user (ARPU) is up 35% with plenty of room to continue growing at similarly attractive rates between cord cutting and adding additional ad-supported content. For the first half o the year, this is up 76% year-over-year.
It’s an easy decision to ride the trend as OTT goes mainstream.
Consumer Tech to Buy: Apple Inc. (AAPL)
Apple Inc. (NASDAQ:AAPL) still has some tricks up its sleeve, and there remain a few catalysts to the upside in the remainder of the year. The iPhone 8 is debuting this week, and while there has been much speculation over colors and features, ultimately, the market knows that this isn’t going to be a ground-breaking product.
However, indicative pricing shows that Apple’s pricing power is still very much intact though we’ll have to wait until the next quarter for data on sales performance.
The recent announcement of iOS business solutions is a nod toward Microsoft Corporation’s (NASDAQ:MSFT) 365 Suite, but certainly a white-space opportunity for Apple to leverage its existing relationships to drive a new revenue stream on the enterprise side. This addition to their existing ecosystem is a very smart one, increasing user stickiness by extending reach to the business side. Loads of cross-selling on an extremely loyal user base is a good recipe for a boost to future earnings.
And don’t forget about the cash. While no material progress has been on repatriation side, there is still upside here if changes take place. But before any of that dry powder gets deployed, you can get arguably the dominant player in consumer tech trading at 18x earnings. Not bad at all.
Consumer Tech to Buy: Oculus VisionTech Inc (OVTZ)
Don’t mistake this Oculus VisionTech Inc (OTCMKTS:OVTZ) for the virtual reality company that Facebook Inc (NASDAQ:FB) bought in 2014. Oculus VisionTech is in the cybersecurity business, provided businesses and consumers with document protection, real-time digital video watermarking, and streaming video content distribution.
Also trading on the Toronto and Frankfurt stock exchanges, Oculus, at the outset, recognized an opportunity to work with players in the entertainment industry to provide digital security for their proprietary content. Their primary Cloud-DPS product is able to confirm authenticity on image stills and protect them from forgery. This product, however, has potential to gain traction beyond studios and networks. Original content integrity at a time when everything is moving to digital formats is crucial.
Admittedly, Oculus is not a stock for everyone, erring on the more speculative side. It has had a software license agreement for use of its proprietary watermarking technology with a major studio, but currently, the focus is on monetizing the Cloud-DPS technology. Licensing would make sense as the Company demonstrates the importance of tamper-proof functions and achieves proof of concept.
Any announcement of new partnerships or licensing agreements would serve as a catalyst for the stock.
Consumer Tech to Sell: GoPro (GPRO)
Going short outright in GoPro Inc (NASDAQ:GPRO) could prove dangerous, but I wouldn’t be long either. Since the IPO in the summer of 2014, shares have gotten clobbered, down 71% since they began trading. As a first-mover, GoPro had the hype and a temporarily uncrowded space to support an initial jump in share price up past the $80 mark.
But it’s been a tale of woes since then. Declining revenues and new competition in a business where barriers to entry weren’t high to begin with. It’s tough to see how management can turn this ship around. They’ve had the last few years to try to get back on track but to no avail.
GoPro will cite the fact that it’s the “#1 consumer electronics brand on Instagram” and “Best-Selling Camera in the U.S. for 14 Straight Quarters,” but profitability remains a pipe dream. Camera units shipped have been lumpy at best, but the overall downward trend in unmistakable.
The second quarter had a pop-up to 1,061 units versus 759 the year prior, but both those are below the 2015 second quarter figure of 1,647. They are losing ground and to drive the nail in the coffin, margins keep compressing.
Consumer Tech to Sell: Fitbit (FIT)
As of the second quarter, Fitbit Inc. (NYSE:FIT) is back to being free cash flow negative. And this condition may be more the norm rather than the exception in the coming quarters. After the two previous quarters proved not as dire as thought, especially on the cash management side, I thought things might have a shot at improving in earnest.
But the fact is that gravity rules. Fitbit has reverted and will continue to trend down. There don’t seem to be any major new product developments to drive topline growth. I’m not even optimistic with the holiday season looming in the distance.
Fitibit just hasn’t figured out a way to stem the profuse bleeding. Even third-quarter guidance on the high end would mean a 21% year-over-year decline in revenues. On the low end, it would be a 25% year-over-year-decline. These aren’t small blips, rather unmistakable step function-like decreases.
Until the brand is able to show some recovery, there are better places in consumer tech to put your money.
Consumer Tech to Sell: Netflix (NFLX)
Even coming off its July post-earnings highs, Netflix, Inc. (NASDAQ:NFLX) still trades at 216x trailing earnings. That, for me, is simply too high a price to pay for its growth profile. I’ve said before that P/E ratios don’t exist in a vacuum. It’s a relative valuation metric. So, when benchmarked against other FAANG peers, how does it look? Expensive, still.
Other peers may trade at lofty multiples but have other business characteristic or network effects that make me more comfortable with paying so high a price. But it’s hard to see when Netflix will be able to better monetize given all the heavy investments in content. How long and how much does Netflix have to spend in order to command higher subscription prices, for example?
Licensing deals have been floated as a source of future revenues, and that is plausible as its IP library grows. And there may be no way to get around high original programming costs in its business. But until Netflix can show more transparent return on investments, it just isn’t as compelling an investment as some of its peers.
As of this writing, Luce Emerson was long AAPL.