Life as a public company for streaming-device maker Roku (NASDAQ:ROKU) has been nothing short of a roller coaster ride. Over the course of its 16 months on Wall Street, Roku stock price first went from $14 to $50, then dropped to $30, rallied to $80, dropped to $30 again, and rallied to $40, where it stands today.
The volatility of Roku stock can be chalked up to the enormous variation in Roku’s potential future performance.
On one end, ROKU could become the face of streaming-service aggregation, turn into the cable box of the streaming world, and one day have hundreds of millions of active accounts, through which the company will collect billions of dollars from revenue sharing and ads. In this scenario, Roku stock could be worth a lot one day.
Conversely, Roku could be squashed by competitors in this space, and rapidly lose active accounts and revenue. In this scenario, Roku stock could be worth nothing one day.
As a result, Roku stock could be worth nothing, in the future, it could be worth $20 billion-plus one day, or it could end up being worth anything in between. That’s a wide range, so wide that it explains the high volatility of Roku stock price.
This volatility will eventually subside as the company’s range of outcomes narrows in the future after it has grown. But the valuation of Roku stock will ultimately be at the upper end of the $0-$20 billion range, so the narrowing process will boost Roku stock.
Positive Developments Make the Bull Thesis on Roku Stock More Likely
In late 2018, the market seemingly forgot that Roku is likely to remain a key component of the rapidly growing streaming market over the long-term. But in 2019, there have been multiple positive developments which have reminded investors that Roku is a growth company. Consequently, Roku stock has rallied this month.
First, Roku added paid subscriptions to Roku Channel, thereby allowing subscribers to watch paid programming from Showtime, Starz, and Epix through the Roku Channel. Second, Roku reported strong fourth-quarter engagement numbers that included a 40% increase in active accounts and nearly 70% growth of streaming hours. Third, Walmart (NYSE:WMT) backed out of plans to launch a streaming service, showing that streaming is hard to do, and that Roku has a big enough moat to keep big competitors away.
All together, these positive developments underscore that Roku continues to innovate, expand, and grow at a rapid rate, perhaps so quickly that it is deterring other companies from entering the space. That’s a major positive development for Roku stock. It means that the bear thesis that competitors will squash Roku and Roku stock is overstated. It also means that the bull thesis of ROKU turning into a major streaming player continues to gain traction.
Increased Size Will Bring Increased Stability
It’s difficult to predict the long-term fate of small companies, so they tend to be highly volatile. As those small companies grow, though, investors gain visibility into their long-term outlook, the range of possible outcomes narrows, and their stocks become more stable.
This process will be favorable for ROKU.
Roku is really small right now. The company has just 27 million active accounts, versus Netflix’s (NASDAQ:NFLX) 140 million paid members. Thus, the question right now is whether Roku will grow to 140 million members like Netflix or lose its 27 million members to bigger competitors like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).
Investors have been uncertain about the answer to that question. As a result, Roku bounced around wildly in 2017 and 2018.
These wild swings may slow in 2019. That’s because ROKU has been a public company for six quarters and in each of those six quarters, its active account growth has been 40% or higher, while its streaming hours have increased by at least 50%.
That is consistent and healthy growth which underscores that, regardless of the surrounding competitive environment, Roku ‘s continued leverage of technology and network effects have enabled it to remain a leader of the streaming device market.
The longer Roku’s growth remains consistent and large, the more likely the bulls’ thesis will become, and the more investors will write off the bear thesis as inaccurate. As this happens, Roku stock price will rise, and at a much more steady and stable pace than has previously been the case.
The Bottom Line on ROKU
ROKU has been highly volatile over the past 16 months because it’s been a small company with a wide range of possible outcomes. But Roku is getting bigger, and is it does, it is becoming increasingly clear that this company has staying power in the streaming market, which is poised to grow over the long-term. The clearer that becomes, the higher Roku stock price will go.
As of this writing, Luke Lango was long ROKU, AAPL, and AMZN.