With so much enthusiasm baked into the valuation for over-the-top TV equipment-maker Roku (NASDAQ:ROKU), someone had to spoil the party. Due in large part to a short-seller’s report, the ROKU stock price tanked badly. In just a little over two weeks, shares have lost over 37%.
Under normal circumstances, this would be a clear signal to run. In a sharply critical view of the company, Pivotal Research analyst Jeffrey Wlodarczak penned an article entitled, “Is Roku Broku?” Citing rising competition from industry giants such as Comcast (NASDAQ:CMCSA) and Amazon (NASDAQ:AMZN), the OTT market is no longer a single-lane highway. That bodes poorly for Roku stock, where the underlying company is a minnow compared to its rivals.
Basically, with more organizations wanting to grab a piece of the streaming pie, they’re willing to undercut OTT pricing structures. For instance, Comcast is giving its broadcast subscribers free Xfinity Flex boxes. Such a move directly clashes with Roku’s OTT player, threatening the viability of the ROKU stock price.
Additionally, much excitement is brewing over Disney’s (NYSE:DIS) streaming platform, Disney+. Pouring salt on open wounds, Apple (NASDAQ:AAPL) is getting into the streaming game with their Apple TV+.
In other words, you can forget about Comcast offering free OTT devices. With a massive influx of competition, the big boys will simply out-dilute the upstart OTT specialist.
Admittedly, the competitive element isn’t helpful. However, I think patient investors should embrace the present volatility in the ROKU stock price. Here are three reasons why:
1. Cheap Entertainment Never Goes out of Style
Ever since the world was introduced to the television set, entertainment has taken a priority in our lives. Sure, the mechanism has changed greatly over the decades. But at the end of the day, we love flashing objects broadcasting through our screens.
This is not just an anecdotal observation. Multiple medical studies have focused on the growing influence of digital entertainment. It’s gotten to the point where television addiction, as well as internet addiction, are worryingly common phenomena.
I mention these trends not to criticize what Americans do with their free time. Rather, I refer them to emphasize that people will give up many things before they give up entertainment.
More importantly, even during economic hardships, workers need distractions from their daily stresses. Especially relevant for Roku stock, a recession would create demand for cheap entertainment platforms like OTT players. Therefore, while rising competition is troublesome, the industry itself will only grow more relevant.
2. ROKU Stock Enjoys First-to-Market Moat
Comcast’s move to offer free OTT devices to its broadband customers is a middle finger to Roku stock. On the surface, it seems like a brazen tactic, but a devastatingly effective one. With Comcast’s massive resources, it could easily win a war of attrition with a smaller outfit.
Yet drill into the granularity, and this tactic doesn’t seem so beneficial for the media giant. First, Comcast isn’t offering free OTT devices to their traditional TV subscribers, for obvious reasons. Getting too aggressive with this play would end up cannibalizing their steadily shrinking network of “corded” subs.
Second, only relatively few people subscribe to Comcast’s broadband-only service. They can win this battle, but it probably won’t impact the bigger picture.
But the third and biggest reason why Comcast’s tactic is a non-issue is Roku’s first-to-market advantage. Contrary to some beliefs, the company isn’t just an OTT device manufacturer. Instead, it has licensing agreements with many top TV makers. Thus, ROKU is integrated into many TV smart sets, which Comcast nor most other competitors can’t claim.
3. Simple Has Its Benefits
One of the noticeable themes of the current investing landscape is the emphasis on agility. In the last century, big conglomerates like General Electric (NYSE:GE) or 3M (NYSE:MMM) dominated investor dollar market share. Now, a lot of these organizations have fallen out of favor.
Consider ROKU’s rivals. You have Amazon which is disrupting everything from groceries to healthcare. Then, you have Comcast which is trying to salvage the behemoth business model with expensive deals and acquisitions.
Roku stock? This is a very simple and streamlined investment. Exclusively focusing on the consumer experience, I can depend on them to respond to this segment’s needs quickly and efficiently.
Plus, I don’t need to worry about ROKU trying to disrupt the auto insurance industry, or some other disparate endeavor. As the kids like to say, they’re staying in their lane. With so much macro uncertainty around us, this simplicity has great value.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
