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Roku Inc Stock Makes for an Interesting Speculative Play

Roku has shown it streaming platform can draw advertisers, which makes it a prime takeover candidate

Roku - Roku Inc Stock Makes for an Interesting Speculative Play

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Roku Inc (NASDAQ:ROKU) isn’t profitable yet, but its latest earnings release gave investors hope it will soon become very profitable.

The hope lies in the company’s revenue mix. During the first quarter, Roku got $61.5 million in revenue from selling its streaming player, but $75.1 million from use of its platform.

It’s the first time revenue from existing users has topped that from selling its streaming stick. The number is up 106% from a year ago, and the company said $53.4 million of that $75.1 million was profit, against just $9.7 million from player sales.

Selling ads against others’ content has always been the play — and the play is working. It was enough to even turn around the uber-bears at Citron Research, which now says, “everything has changed” and you, too, should buy the stock.

Valuing the Platform

At its May 31 opening price of about $38.50 per share, Roku is worth $3.9 billion. That’s about 8 times last year’s revenue. Facebook Inc. (NASDAQ:FB), by contrast, sells for 13 times its trailing year revenue. According to the bulls, that is the comparison that matters.

Roku earns money from licensing and content, but two-thirds of the $75 million in first-quarter platform revenue was advertising. Once a platform is established, ad sales are fully automated, and most of that revenue flows directly to the bottom line. It certainly does at Facebook.

Another bullish point from the Q1 report. Roku said that almost half of its 21 million users no longer have a TV contract — or never had one. Roku is thus positioned as a key way to reach “cord cutters,” an intensely watched group and one that is increasingly difficult to reach with advertising.

How High the Moon

But if you’re going to spend 8 times revenue for a company, you need to see some great growth numbers. Roku said in that bullish quarterly report it is expecting revenue of about $700 million for the full year, against $512 million last year. That’s a 40% growth rate, but you’re still paying almost six times expected 2018 revenue for the stock.

In addition to seeing ad profits, bulls also see a sale in Roku’s future. In the hands of an existing network or platform player, those streaming users could be a lifeline. 21st Century Fox Inc. (NASDAQ:FOXA) owned about 7% of Roku at its IPO, and that is not part of the company’s asset sale to the Walt Disney Co. (NYSE:DIS). But BSkyB, which Disney is trying to buy, also has $12 million invested in Roku, which could set up an interesting battle down the road.

Neither Disney nor Fox has enough of Roku to block a deal to another potential acquirer. That means Alphabet Inc. (NASDAQ:GOOGL) or Amazon.Com Inc. (NASDAQ:AMZN), which also have streaming hardware platforms, could also come in with a bid. Who knows, maybe Alibaba Group Holding Inc. (NASDAQ:BABA) may try to buy it too.

The prospect of a bidding war for Roku has bulls salivating.

The Bottom Line on ROKU Stock

The bottom line here remains speculative.

We don’t know how many consumers are going to cut the cable cord, or how fast. We don’t know how much freedom they’re going to have from their cable operators, which are also their internet service providers (ISPs) and, with the end of net neutrality, could now be free to squeeze them by raising internet prices and forcing expensive add-ons like TV Everywhere on them.

But the future suddenly looks promising for Roku. It has created a valuable platform, one that should become profitable within a few years. It may indeed be worth throwing some of your “mad money,” the dollars you can afford to lose, at Roku.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.

Article printed from InvestorPlace Media, https://investorplace.com/2018/06/roku-stock-interesting-speculative-play/.

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