Back in late September, Roku Inc (NASDAQ:ROKU) pulled off one of the year’s hottest IPOs. But the enthusiasm has quickly faded. After reaching a high of $29.80, the ROKU stock price has since dropped to $21.65. Although, for those investors who bought the shares at the offering price, the gain is still an impressive 54%.
So perhaps now is a time to think about making a purchase of ROKU stock? Or could there still be further deterioration?
Well, when it comes to IPOs, the volatility can last for quite a bit of time as the shares get seasoned in the markets. A big part of this is that Wall Street needs to digest a couple earnings reports to understand the fundamentals and growth path.
ROKU Stock Upsides
Now as for ROKU stock, there are definitely some clear fundamental advantages. The company is the pioneer of players to help people stream content. And yes, the growth has been strong. For the first six months of this year, ROKU’s users streamed more than 6.7 billion hours of content, up 62% on a year-over-year basis. In all, there are 15.1 million active accounts – which makes the company the No. 1 player in its industry (the second largest player has 13.3 million active accounts).
The key driver for the success is the megatrend of OTT (Over-The-Top) services, which is disrupting the traditional cable television market. Customers want to have control over their spending on the kinds of content they want. As validation of this, companies like Walt Disney Co (NYSE:DIS) and CBS Corporation (NYSE:CBS) are investing large sums in developing OTT offerings.
Now another critical factor for the ROKU stock price is that the company has a compelling business model. The player is essentially a loss leader, which allows for monetizing the user base with advertising, subscription and transactional revenues (these are called platform revenues). This is enhanced by the ever-growing portfolio of content, which includes over 500,000 movies and TV episodes.
Risks to the ROKU Stock Price
Of course, ROKU does face some challenges. First of all, the company’s platform revenues are far from stable. Here’s what the S-1 notes:
For example, we are not able to fully utilize program level viewing data from many of our most popular channels to improve the relevancy of advertisements provided to our users. Other channels available on our platform, such as Amazon, Hulu and YouTube, are focused on increasing user engagement and time spent within their channel by allowing them to purchase additional content and streaming services within their channels.
Such restrictions are likely to place a cap on advertising revenues.
Next, ROKU must battle mega rivals. Note that Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) offer their own players. Oh, and TV brands like LG, Samsung and VIZIO have their own built-in streaming solutions. This is also the case with game consoles from Microsoft Corporation (NASDAQ:MSFT) and Sony Corp (ADR)(NYSE:SNE).
Bottom Line 0n ROKU Stock
Again, ROKU stock chart is likely to be fairly erratic for awhile. Although there could be some catalysts within the next few weeks. One is that on Nov. 7 the “quiet period” will expire. This means that ROKU’s underwriters, like Morgan Stanley (NYSE:MS) and Citigroup Inc (NYSE:C) will publish their analysts’ reports. As should be no surprise, these are often quite bullish. So the ROKU stock price is likely to get a lift, at least for the short-term.
Yet as seen with other high-profile IPOs, such as Snap Inc (NYSE:SNAP) and Twilio Inc (NYSE:TWLO), these kinds of gains can be fleeting. In other words, when investing in the public markets, it’s often a good approach to not hold on for too long.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
