Like other red-hot IPOs before it, streaming video platform maker Roku Inc (NASDAQ:ROKU) had a really nice honeymoon with Wall Street for several months.
But that honeymoon abruptly ended in late February when Roku’s strong quarterly numbers were overshadowed by a weak guide. As anyone who follows stocks knows, a richly-valued, freshly-public, hyper-growth company like Roku needs beat-and-raise quarters to head higher. Roku fell short on the “raise” side of things. So ROKU stock dropped big.
And it hasn’t recovered.
ROKU stock dropped from $51 to $42 the day after the report. Now, it’s at $38. That is more than 35% off its 52-week high of $59.
Clearly, investors are hesitant to buy back into this name. And with good reason. Roku is staring at a ton of competition from some of the biggest and most resourceful players in technology. The comparisons to GoPro Inc (NASDAQ:GPRO) and Fitbit Inc (NYSE:FIT), two former Wall Street favorites that have each lost 90% or more of their value after competition destroyed their respective growth narratives, are legitimate.
Unfortunately, the competition isn’t going away — which means Roku stock isn’t heading sharply higher anytime soon, either.
Why Competition Could Kill Roku
Competition is bad for every company. But it is especially bad for consumer tech companies like Roku.
Much like GoPro and Fitbit, Roku makes an easily commoditized consumer technology hardware product. GoPro makes action cameras that can easily be replicated and/or replaced by smartphone cameras. There isn’t any moat there besides GoPro’s branding. Fitbit makes wearables that can easily be replicated and/or replaced by smartwatches. There isn’t any moat there besides Fitbit’s branding.
Likewise, Roku makes streaming video players that can easily be replicated and/or replaced by multi-function smart home devices. There is nothing truly unique about the Roku streaming video player. It does the same things as products made by Alphabet Inc (NADSAQ:GOOG), Apple Inc (NASDAQ:AAPL), and Amazon.com, Inc. (NASDAQ:AMZN).
That means there isn’t any moat there besides Roku’s branding. This isn’t a good place to be, especially when competing against Google, Apple, and Amazon.
Moreover, as the smart home revolution continues to unfold, Roku is at a big disadvantage to those tech giants.
Roku makes one device in the smart home ecosystem. Alphabet, Apple, and Amazon are creating the entire smart home ecosystem — everything from streaming device players to smart TVs to smart speakers to smartphones. Consequently, they will naturally build in synergies between their streaming device players and other smart home products.
For example, the synergies between Alexa and the Fire TV Stick will only grow over time. Same with the synergies between Google Home and Google Chromecast, and the synergies between Apple HomePod and Apple TV.
As such, the benefits of owning both a Google Home smart speaker and Google Chromecast will only grow over time. As those benefits grow, many consumers could ditch their Roku streaming players for other streaming players that offer more cross-platform advantages.
Because of this, Roku finds itself in a similar boat as Fitbit and GoPro. Roku is better situated than those two struggling consumer tech companies, because Roku has a legitimate, high-margin software component (GoPro and Fitbit both failed to build that side of their business out). Roku is also situated better because, arguably, the over-the-top streaming video market is much larger than the wearables and action camera markets.
But Roku still faces massive competitive threats in the form of the biggest and most resourceful players in technology. That is a bad place to be for a consumer tech company with a small moat.
Bottom Line on ROKU Stock
For a while, ROKU stock was a winner. Nothing could knock the stock off course. It was destined to hit $100 as over-the-top streaming player adoption boomed. Competition concerns were mitigated.
That growth narrative hit a major snag last month with a weak guide. ROKU stock hasn’t rebounded since. Competition is now front and center. Secular tailwinds have taken a back seat.
This dynamic will remain in place into the foreseeable future. Next quarter could flip the sentiment again. But, until then, ROKU stock will remain depressed. Longer term, it’s tough to see ROKU stock exploding higher given the massive competitive tailwinds from aggressive competitors.
As of this writing, Luke Lango was long GOOG, AAPL, and AMZN.