In my last write-up about Roku Inc (NASDAQ:ROKU), I mentioned that I have never invested in initial public offerings. I have a good reason for that: I hate IPOs. Despite all the data you have going in, you never truly know how things will pan out. Fortunately, ROKU stock defied what had been a tough season for market debuts.
However, don’t get complacent here.
When I wrote positively about the ROKU IPO, I mentioned that this was an extremely speculative bet.
As I and several of my InvestorPlace colleagues have warned, the streaming sphere is fiercely competitive. Yes, streaming is the future, but that’s exactly why folks want a piece of the action. And by “folks” I mean Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
Currently, Roku stock benefits from the underlining company’s top billing in the streaming device market. Furthermore, ROKU has been increasing its dominance in the sphere. Again, though, this is no time for complacency. While Apple has made missteps and Google appears to be dropping off, Amazon is increasingly aggressive. Plus, it’s Amazon — a company that has the resources to play nasty, if it chooses to.
Of course, I don’t hold a crystal ball. ROKU stock could very well shake off these challenges and move higher. But if you took my previous advice and bought ROKU as an IPO, you’ve more than doubled your money, even with the recent consolidation pattern. Unless you’re an avid cryptocurrency trader, triple-digit returns inside of four months is no joke!
Calling the situation for potential new investors is a lot easier: don’t do it! The easy money in Roku stock has probably already been made. Plus, you’d be entering the markets at a time when early buyers are contemplating their exit plan.
ROKU Is Facing the ‘Sony Conundrum’
InvestorPlace contributor Will Healy wisely noted that ROKU will eventually become obsolete. Smart TV manufacturers are implementing streaming capacity in their products. This integration will only improve, meaning that separate streaming device companies are racing against time.
It’s a conundrum I faced when I worked for Sony Corp (ADR) (NYSE:SNE). Sony has two main camera categories: digital-SLR, which remains highly popular, and point-and-shoot. The latter, once the “in” item among tech geeks, is staring dead-center at obsolescence.
Every year, smartphone cameras made dramatic improvements. Earlier this decade, my fellow Sony colleagues (quietly) acknowledged that point-and-shoot cameras were becoming alarmingly outdated. Why take yet another device with you when a compact smartphone can do everything that a point-and-shoot can do?
Now, it’s not all bad news for ROKU stock. In 2015, Sony released the Cyber-shot DSC-RX100 IV, which was one of the few cameras featuring “super slowmo” capacity. This breathed new life into point-and-shoot division, proving that such cameras were still relevant.
But even with the best engineering innovations, it’s going to be hard for Sony to sustain the point-and-shoot category. Today, Apple has the iPhone X, which features higher-resolution slowmo capacity than the RX100. Moreover, trendy accessories, such as the DJI Osmo Mobile gimbal device, are geared specifically for smartphone cameras.
ROKU will stay relevant for the foreseeable future. But investing at the current price means that you are willing to stomach the risk that management will somehow figure something out. At the IPO level, it was a smart gamble. Now, at a 100% premium, I don’t want to take the chance.
Don’t Forget TVs Race to the Bottom
Further casting doubt on the longer-term picture is the TV market’s race to the bottom. Multiple manufacturers found it unprofitable to compete in the sector, reducing the number of competitors. That hasn’t driven up prices, though, as semiconductors become smaller and cheaper.
Today, for a few hundred dollars, you can have features that you could only dream about ten years ago. This consumer pricing trend is problematic for ROKU stock, as it makes their services less valuable. So unless they’re prepared to deliver a fresh strategy when obsolescence eventually comes around, the company stands on unstable ground.
While the streaming sector is exciting and lucrative, ROKU ultimately feels pressure from multiple-dimensional competition. They have to worry about their direct rivals, in addition to structural variables in the form of innovative TVs.
Like I said, at $20, ROKU stock was intriguing. At $40, I’m taking my profits and running for the door.
As of this writing, Josh Enomoto is long SNE.
