What’s Next on This Wild Ride for Roku Inc Stock?

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ROKU stock - What’s Next on This Wild Ride for Roku Inc Stock?

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Streaming video platform Roku Inc (NASDAQ:ROKU) has been on quite the wild ride since its IPO in late 2017. ROKU stock popped on its first day of trading. Then it cooled off and dribbled lower over the next several weeks.

But then third quarter earnings hit the tape, and they were all the ammunition bulls needed to light a fire under ROKU stock. The stock proceeded to nearly triple from $20 to right around $60. It’s cooled off since, but still hovers right below the $50 level.

What’s next? Holiday earnings. Due after the close on Wednesday, Feb. 21.

Given this stock’s big first earnings move, the relative infancy of the business, the high short interest, and the big valuation, it’s almost a guarantee that the wild ride in ROKU stock will continue with the holiday earnings report.

Will that wild ride shoot ROKU stock higher? Or will it end this parabolic run and send ROKU stock lower?

It’s tough to say. I understand the near-term bull thesis laid out by Needham’s Laura Martin and others, but I still think this is a company doomed to be eaten alive by competitors in the long run. Consequently, while I think this stock may head higher in the near term, I think that only sets the stock up for bigger declines in the long term.

Roku Has Big Competition

Here’s the bull thesis on ROKU stock in a nutshell.

This company is the second coming of Netflix, Inc. (NASDAQ:NFLX), except better. All Roku does is aggregate and provide a distribution channel for over-the-top streaming services, meaning that regardless of which streaming service wins at the end of the day, ROKU will win so long as streaming TV viewership grows in general.

That seems like a slam dunk, given current cord-cutting and OTT-TV-adoption trends. Moreover, because the company is simply a distribution channel, costs are pretty low. The whole growth narrative of ROKU is based on its platform business (not the hardware business), and that platform business runs at 70%-plus gross margins. Consequently, as the software business scales, the overall gross margin profile will improve. That, coupled with operating leverage, will lead to robust gains in profitability.

That all sounds fine and dandy. But the bull thesis ignores one critical component: competition.

Growth of OTT TV viewership does not guarantee success for ROKU. Roku sells an easily commoditized tech hardware product and is rubbing elbows with the biggest and most resourceful players in the tech world. The Roku Streaming Stick isn’t noticeably better than Google Chromecast, made by Alphabet Inc (NASDAQ:GOOG), or the Fire TV stick, made by Amazon.com, Inc.(NASDAQ:AMZN). By the same token, Roku TV isn’t noticeably better than Apple TV.

So what happens over the next 5-10 years? OTT TV viewership explodes. Essentially everyone has an OTT TV platform. Most will have that capability just built into their smart TVs. Some will have Chromecast. Some will have Fire TV. Others will have Apple TV.

But I don’t think many will have Roku. Why? Because Roku doesn’t have an accompanying smart home offering to complement its OTT TV platform. Over the next 5-10 years, we will see smart TVs and streaming media products morph into all-in-one hubs for smart home tech.

Indeed, this trend has already started. Sony Corp (ADR) (NYSE:SNE) just rolled out an update to its Android TVs that enables Google Assistant. Amazon Fire TV has a similar integration with Alexa. Same with Apple TV and Siri.

Roku has no such integration capability, and that puts the company at a huge disadvantage. Even if the company does roll out smart speakers or other smart home tech, they are way behind the curve. And doing so will plunge them into even deeper competition with the biggest players in tech. That isn’t a place you want to be, nor place you will find much success.

At the end of the day, I see ROKU getting squeezed out of the market it essentially invented.

Bottom Line on ROKU Stock

The quarter was probably pretty good. Given the huge surge in holiday shopping and Netflix’s strong numbers, I think it’s likely OTT streaming platforms like Roku sold very well this holiday season.

With the short interest so high, that could create a big short squeeze and ROKU stock could fly.

But I don’t think any post-earnings pop is sustainable in the long-term. Over the next 5-10 years, Roku will get squeezed out by Apple, Amazon and Google — all of whom will leverage their smart home tech to create more robust and capable streaming products than Roku.

As of this writing, Luke Lango was long AAPL, AMZN, GOOG, and NFLX. 

 

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/whats-next-wild-ride-roku-stock/.

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