Roku (NASDAQ:ROKU) has seen the usual ups and downs of a recent IPO. Roku stock came out of the gate under $20 per share and didn’t do much at first. But strong earnings soon had investors racing into Roku stock. It would reach as high as $59 per share by the end of 2017.
It would go on to lose half its value in early 2018. A weak earnings report in February dinged the stock. And the announcement that Best Buy (NYSE:BBY) and Amazon.com (NASDAQ:AMZN) would be working together hit ROKU stock further. Previously, Best Buy used Roku’s operating system for in-house TVs. The swap to Amazon’s technology rightfully scared investors.
That said, Roku has overcome those obstacles, and the stock is on the rise again. From a low of $30 in early April, ROKU stock is back up to $43. And that’s not all. I expect ROKU stock to make another run for the $60-mark in coming months. That said, there are still real concerns that should keep you from blindly buying and holding ROKU stock indefinitely.
ROKU Stock Cons
Little Moat: Inherently, Roku has little competitive moat to speak of. The company has successfully transitioned away from just selling hardware to now coming as the preloaded software option on newly manufactured smart TVs. And the advertising business is gaining ground. That’s great news.
But there’s nothing to guarantee that Roku will be able to maintain that position. TV manufacturers such as Samsung and LG have the technical know-how to create their own perfectly good operating systems. If being the pre-loaded operating system on a TV is sufficiently profitable, expect many manufacturers to try to compete away Roku’s edge.
Rising Competition: The Best Buy story is just one sign of the mounting competition that Roku faces. In its SEC filings, Roku said that it expected Best Buy to make up more than 10% of product revenues in 2018 — losing a substantial chunk of that to Amazon is bad news. Amazon is a particularly powerful competitor, as it can leverage its industry-leading Alexa voice control technology for a particularly immersive user experience.
But Amazon, despite having the next largest share of the industry, is hardly the only rival. Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) among others also continue to innovate in the space. Roku, as the smallest player in terms of financial resources, has an uphill battle to stay ahead of the curve.
Minimal Revenue From Netflix: Investors seem to correlate Netflix’s (NASDAQ:NFLX) with that of Roku. We’ve seen ROKU stock jump in sympathy with strong earnings results from Netflix, for example.
But this seems like an error. While it’s true that Roku users spend a ton of their streaming time at Netflix, this generates minimal actual revenue for Roku. In its most recent annual filing, Roku disclosed that Netflix alone accounts for one-third of all time spent on Roku’s platform.
Despite that, Roku admits that “although Netflix is the largest provider of content across our platform, revenue generated from Netflix was not material to our overall revenue during the year ended December 31, 2017, and we do not expect revenue from Netflix to be material to our operating results for the foreseeable future.” Roku relies on selling ads for much of its revenue. But the Netflix user experience doesn’t give Roku many opportunities to sell ad content.
ROKU Stock Pros
Transitioning Business Model: When Roku stock came public, short-sellers were quick to hound the company. The bears said that Roku was simply another piece of fad hardware, and said ROKU stock would end up a massive bust like FitBit (NYSE:FIT) and GoPro Inc (NASDAQ:GPRO).
However, this argument missed a major point. Roku doesn’t just sell low-margin hardware to consumers. Instead, it is selling an ecosystem. Sure, up front, Roku made profits from selling hardware. But now, the main business going forward is deriving more profits from each user. And while revenues from licensing the operating system to TV manufacturers may not last indefinitely, that’s also a nice profit stream while it’s going.
Targeted Ads: The big advantage for Roku is its targeted ad platform. Roku is able to obtain far more information about its users than a traditional TV advertiser has. With broadcast TV, marketers won’t pay much per impression since the audience is so vast. In general, only a small portion of viewers will be in the target market.
Roku, however, has far more detailed information on its users and thus can offer up a much more attractive ad environment. For free and advertising-based content, such as The Roku Channel, the company has many opportunities to sell these targeted high-margin advertising slots.
Citron Turns Bullish: Citron Research is one of the most well-known short-selling firms out there. For well over a decade, Citron has published abrasive reports recommending that investors bet against companies. It often calls targeted companies frauds or zeros.
In November, Citron called ROKU stock a “total joke.” It suggested the only way the company’s valuation made sense was if Roku started streaming bitcoins to its viewers. In an unusual move for Citron, however, it recently did an about-face and is now long ROKU stock. Citron claims that in light of valuations for rival-type businesses such as Netflix and Trade Desk (NASDAQ:TTD), Roku is now comparatively cheap. On top of that, Citron sees Roku as an ideal buyout target. Given that bears have still sold 18% of ROKU stock short, there is plenty of firepower left for a further short squeeze.
ROKU Stock Verdict
After a strong earnings report in May and increasing proof that the company’s advertising business is revving up, ROKU stock is on the right trail. Combine with a strong short squeeze and Citron’s surprising endorsement, and it’s not hard to see ROKU stock running back up to $60.
Once it gets there, however, it will be time for caution. In the longer-term, ROKU stock is quite expensive on most valuation metrics. On top of that, it simply doesn’t have the competitive moat to safeguard its business. This isn’t the next NFLX stock — without its own content, there is little to ensure that rival smart TV operating systems won’t overtake the company with time.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.