Roku Inc (NASDAQ:ROKU) is a streaming and device company. How would you like to buy into a business that not only competes directly with Amazon.com, Inc. (NASDAQ:AMZN), but with Alphabet Inc (NASDAQ:GOOGL), Netflix, Inc. (NASDAQ:NFLX) and Apple Inc. (NASDAQ:AAPL) as well? How would you like to do it with a me-too product at a knock-down price, against services whose prices start at free? If that sounds enticing, ROKU stock is for you.
ROKU stock went public on September 28. The first trade went off at nearly $29 per share. ROKU stock will open for trading on October 19 at around $22 per share.
The Platform Sizzle
Those who are bullish on ROKU stock, including our own James Brumley, believe the company will gain profitable revenue from selling ads and access to its platform.
In the near term, there is something to that. The company’s gross margins from its software platform are far superior to what it gets for the hardware, which now sells for under $50.
Beating the giants on the hardware front means having a better remote and getting the technology inside TVs so consumers don’t even have to buy it.
So far, ROKU stock is hanging in. Its solution was still leading the market in July, thanks in part to the perception that it’s neutral — supportive of all streaming solutions and not pushing its own. Parks Associates estimates its market share at 37%, but the giants are right on its heels, so it’s hard for me to see it growing from here.
Like Overripe Fruit
Farmers know that you pick lemons and bananas when they’re green. You don’t wait until they’re yellow.
Technology is the same way. It is the promise of a company that offers the most value and that lures investors. This occurs when it’s at the bottom of the adoption curve. Once a market is mature and once a company starts focusing on profits rather than growth, its value is going to fall. It’s going to be extracting capital, not adding to it.
Thus, ROKU stock is an example of what happens when you wait for a unicorn to mature until it is ready for the glue factory. It’s an object lesson of what is in store for companies like Uber and Airbnb, when they try to go public.
Roku is telling investors it’s now going to create its own services, and that’s fine. Then how is it then going to proclaim neutrality, especially with competitors dropping prices to the floor to gain market share?
It’s just not worth the risk, as Will Healy noted recently. Roku has turned in only one profit, in the fourth quarter of 2016, and it is now loading up the balance sheet with debt. Operating cash flow is still positive (but it’s not booming) at a total of $56 million for the first half of 2017, on a market cap of over $2 billion.
History Says No for Roku Stock
The history of technology shows that, in the absence of true innovation, size matters. Roku has a me-too product, and it’s a very small company, relative to the competition.
Maybe I’m wrong, and Facebook Inc (NASDAQ:FB) will decide it has to get into streaming, buy ROKU stock for $4 billion and add its own software to the bundle. Maybe my beard is going to turn back to red next weekend.
This is a cult stock, and it’s too late in this bull market for such a stock to make money before the roof caves in.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB and AMZN.
