You don’t have to look just at the technical charts to understand the appeal of Roku (NASDAQ:ROKU). Thanks to the momentum of rapidly increasing digitalization, smaller companies are able to disrupt much larger establishments. With ROKU, the company specializes in over-the-top streaming devices that essentially bypass broadcast-television platforms (and their associated restrictions); hence, the dramatic rise in the Roku stock price.
And it’s not just the disruption that has many investors eyeballing this upstart firm. Instead, ROKU has already levered an outsized impact on the broader media landscape. Shortly after its introduction, the company’s streaming-TV equipment dominated market share, beating out behemoths like Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), and Apple (NASDAQ:AAPL).
Even more impressive, ROKU has held onto its overwhelming superiority. For instance, the company leads the connected-TV devices market, accounting for 30% of U.S. sales in the first quarter. Notably, the number-two provider is Sony’s (NYSE:SNE) ultra-popular PlayStation network. Obviously, this provides an even greater impetus to buy up Roku stock.
And if that wasn’t enough, research firm Strategy Analytics forecasts that Roku’s connected-TV devices market share could hit 70%. From that perspective, investors can justify the astounding leap in the Roku stock price.
From everything that we see, as well as the company’s track record, very few analysts will contest the point that ROKU is a worthy tech name. But the question now isn’t whether the streaming-equipment provider has a viable business. Rather, it’s whether prospective buyers should consider taking a stab at Roku stock.
Although I respect the disruption, I can’t recommend going all-in here. Let me explain why:
Roku Stock Trading Well Above Its Fundamentals
Among the many bullish factors driving the Roku stock price is the underlying company’s monthly active user (MAU) base. In the most recent Q1 earnings report, ROKU registered 29.1 million MAUs on $206.7 million in revenue. Thus, the company generates $7.10 of sales per user.
It’s an impressive feat because between Q3 2016 and Q3 2018, the revenue generated per MAU appeared to be declining. But come Q4 2018 with its record-busting sales haul of nearly $276 million on 27 million MAUs, the narrative quickly turned incredibly bullish.
Moreover, Q1 2019’s sales-per-user metric of $7.10 exceeded the year-ago quarter’s tally of $6.57. In Q1 2017, sales per user measured $7.05. Thus, we’re seeing a noticeable shift in individual consumer demand.
So why shouldn’t investors consider piling into ROKU? Because at some point, the fundamentals matter. Yes, the company dominates the streaming-TV and equipment market ahead of established players. But the established players are all profitable. On the other hand, ROKU is not, which detracts from its overall argument.
Let’s give credit where it’s due. Management has done an incredible job whittling down earnings losses last year. For example, back in 2017, net income measured a whopping loss of $63.5 million. Last year, losses were slightly less than $9 million.
But in Q1 2019, the streaming-equipment provider recorded a loss of $9.7 million, noticeably more pronounced than the $6.6 million loss in Q1 2018. Stated differently, the company is in a race to have its revenue potential convert to real earnings.
Working against management, though, is the fact that MAU year-over-year growth has steadily slipped from Q3 2017’s 48% to Q1 2019’s 40%. Plus, current per-user revenue is still down from Q4 2016’s haul of $10.99.
Just Look at the Charts…
At the top, I commented that you don’t need to look at the technical charts to gauge Roku’s massive outperformance and popularity. But on the flip side, the technicals also provide ammunition for the bears.
Consider that on a YOY basis, shares have skyrocketed over 112%. But in terms of revenue, the company gained only 51%. Further, per-user revenue increased by only 8%. Don’t get me wrong: these are strong numbers. But I don’t they’re strong enough to pile in at this price point.
Also, please don’t confuse this write-up as a perpetually bearish angle on Roku stock. As I mentioned, this company has a firm hold on the OTT market. Therefore, depending on the magnitude of a possible correction, I may be interested in picking some shares up myself.
Invariably, though, you must stay agnostic with the markets. Right now, I’m afraid this consumer-tech firm has taken on an almost cult-like furor. Let it cool and at that point reconsider the narrative.
As of this writing, Josh Enomoto is long SNE.