In late June, yours truly here warned investors to steer clear of Roku (NASDAQ:ROKU), as Roku stock looked positioned for a pullback. ROKU shares accelerated their pullback that was already underway out the time, losing nearly 20% of their value from the mid-June peak to their early July low.
Then the bulls stepped in, driving the Roku stock price to a new record high (albeit just barely) by the middle of this month.
I’m going to stick with my bigger-picture bearish thesis though. While Roku has shocked the world by stealing a commanding market share that arguably should currently be held by the likes of Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), investors may soon start to struggle with an unjustifiably rich valuation.
It’s not a premise all investors are going to like. But, there are four specific reasons the stock’s incredible rally could be entering a prolonged cooling phase.
Tough Timing for Roku
In its early days, Roku’s revenue was almost entirely driven by sales of its devices, a set-top box that delivers a streaming video signal to a television. Platform revenue didn’t materialize until 2016. Platform, or ad-driven, revenue didn’t eclipse device sales revenue until the first quarter of last year.
It’s widened the lead in the meantime, with the 96% surge in platform revenue during the second quarter of last year marking the peak in its divergence.
Roku is mostly a platform/advertising company now and being compared to its past success is going to feel like a relative disappointment, even if it provides a still-heroic double-digit growth pace of platform revenue.
Overestimated Opportunity
Though the cord-cutting phenomenon has been underway for years and the streaming industry has only scratched the surface of the opportunity, we now know enough to know operating a widely-used platform doesn’t necessarily ensure the production of jaw-dropping revenue.
Vince Martin laid out the concern succinctly a week ago, pointing out that even though Netflix (NASDAQ:NFLX) and Alphabet’s YouTube are the two most-watched streaming video options, neither company adds an especially impressive figure to the company’s top or bottom line.
Planned competing services from the likes of Disney (NYSE:DIS) or AT&T’s (NYSE:T) property WarnerMedia could pay more for more prominent placement within the Roku interface. But, Martin argues that it somehow seems unlikely those newcomers are interested in paying a higher (relative) price just to compete with the two kings of on-demand video.
Underestimated Headaches
Roku recently announced international expansion plans as the solution to the problem of slowing platform growth. It’s largely a function of its user base, and places like the United Kingdom, France, Ireland, Mexico and several Latin American countries are still waiting for a solution-provider like Roku.
Foreign markets aren’t always easy to plug into, however. They often require a different collection of programs that could prove challenging to curate, and they sometimes mandate different technical specs or impose different broadcasting rules.
There’s an opportunity to be sure, but expanding outside of North America won’t be nearly as quick or easy as some investors are presuming.
Analysts Wary of ROKU Stock
Finally, while investors have renewed their willingness to take a chance on Roku stock since the beginning of July, analysts haven’t flinched. They’ve stuck with their mostly-unenthused calls, which currently deem Roku only slightly better than a “Hold.”
They’re also sticking with a consensus target price of just under $84, versus the stock’s current price of just under $107.
It’s not an insignificant nuance. By and large, analysts have been willing to disregard traditional fundamental valuation standards when the growth story is good enough to keep pushing a stock upward. The fact that they’ve chosen to stand pat this time around says these professionals are pretty certain there’s not even much momentum-driven upside left to tap.
Looking Ahead for ROKU Stock
It’s not an indictment of the company or its business model. Indeed, Roku is on a plausible path to profitability sometime in 2021. The trajectory is enough to inspire bullishness in the meantime.
That’s a long time to wait, though. Between now and then, the company’s still got plenty to figure out. In particular, it’s got to figure out what its platform truly is.
It was a question obscured earlier this year when it stopped being a purely neutral platform by starting to feature the Roku Channel. The Roku Channel’s content is also available without a Roku device, further muddying its focus.
Those are all questions that will be answered in time though, en route to profitability. Though due for a sizeable setback, it’s still a name to buy on any good dip.
In more ways than one here, timing is everything.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
