Almost a month ago, yours truly here suggested Roku Inc (NASDAQ:ROKU) was a company with a viable future, but a recently IPO’d ROKU stock wasn’t buyable yet. It needed to be taken out behind the woodshed, so to speak, and get the whupping most newly minted stocks endure before investors could start to price in the potential of the company’s technology.
I stand by both parts of my thesis, perhaps more decidedly so in light of developments that have taken shape in the meantime. Not only has the ROKU stock price fallen almost 15% since my previous look — inching its way to a more-absolute bottom — the company has unveiled a couple of new products that point to the direction it’s going.
ROKU shares still aren’t a buy, but when they finally do hit a good, trade-worthy bottom, the bullish case just got even better.
Picking Up Steam
The short version of a long story: Roku makes set-top boxes that attach to television sets and feed them streaming video content via the internet. Its technology is comparable to the Apple TV box from Apple Inc. (NASDAQ:AAPL), though other such devices are out there. The Fire TV Stick from Amazon.com, Inc. (NASDAQ:AMZN) and the Google Chromecast from Alphabet Inc (NASDAQ:GOOGL) are also part of this market, but amazingly enough, Roku leads against its formidable competition.
And yet, it’s not this leadership that makes ROKU stock such an interesting prospect. It’s how the company sees and has positioned that technology that makes Roku distinctively different from similar hardware made by Apple or Amazon.
First, though not foremost, Roku sees its set-top box not just as a revenue driver in and of itself, but as a means of driving advertising revenue. Though subtle, the platform pipes in paid advertisements on its main, user-entry screens, collecting revenue in a secondary channel.
It’s a big deal though. In the second quarter, platform/advertising revenue grew to $46 million from $23.6 million in Q2 2016 and at its current pace could soon eclipse revenue from sales of the devices themselves.
Rival devices like Apple TV and Chromecast just aren’t utilized in quite this way — as a means of delivering ads on the equipment’s main entry screens.
Second, and arguably more important to ROKU stock owners, the company is now starting to license its technology, and its name, to cable companies. Late last month, the company unveiled a 4K UHD/HDR-capable OTA streaming player, called the Telstra. In short, the Telstra is not only a terrestrial (airwave) television tuner, but also a means of delivering live and streaming cable video to viewers. Each Telstra can be customized by the cable television/internet provider offering it to their customers.
Separately, Philippines provider Globe Telecom has licensed Roku’s technology to market an internet-based video device branded as a Globe device.
These licensing deals are relatively off-the-radar relationships right now, with none of them taking shape in the United States… yet. With the cord-cutting movement well underway (and accelerating) here and abroad, though, the market is changing. Partnerships are being forged, and the lines that had previously separated makers of set-top boxes and makers of television and cable companies themselves as well as internet providers are being blurred. Though Apple television sets have long been rumored and TV’s with Chromecast technology built-in are a reality, Roku seems to be taking the lead as the go-to streaming solution that other kinds of players know they need to bring to the market.
The next stop? Roku as a full-blown, traditional cable box. Cable TV provider Comcast Corporation (NASDAQ:CMCSA) experimented with the idea early this year. It appears to be the shape of things to come, with Roku in the lead.
Bottom Line for ROKU Stock
As exciting as the prospect for a new kind of melded product is, I also still stand behind my original thesis. That is, ROKU stock is poised to suffer a rather steep capitulation, as most newly public stocks do. That’s not an indictment of the company. It’s just the reality of how traders generally treat IPO’s.
Once that hard landing is made, however, Roku is positioned to turn into one of the market’s better, and mostly unexpected, growth stories in the wake of a maturing streaming-video market. Keep Roku stock on your watchlist.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.