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New Competition Threatens Bull Case for Roku Stock

Valuation seems rich given threats to market share with Roku stock

Roku (NASDAQ:ROKU) stock saw a tremendous rally over the summer. Shares surged 91% from $92.35 a share on July 1 to a high of $176.55 on Sept. 9. But recent developments have pushed down the ROKU stock price. Shares are down 26% from the 52-week high.

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With Comcast (NASDAQ:CMCSA) and Facebook (NASDAQ:FB) launching streaming devices of their own, Roku’s market share is under threat. This is on top of existing competition from Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). Roku’s path to profitability faces additional hurdles. Nevertheless, the company continues to drive significant top-line growth.

With these new risks in mind, is ROKU a buy today? Roku stock continues to be overvalued. While Comcast and Facebook may stumble with their streaming plans, Roku faces many headwinds as it scales up. Let’s take a closer look and see why it’s best to avoid Roku stock.

ROKU Faces New Streaming Device Competition

As I wrote on July 12, ROKU is a takeover candidate for both “Big Media” and “Big Tech.” Looking to jump-start their streaming business, such a buyer may be willing to buy the company, even at a high valuation. But I countered that thought with the counterpoint of strategic buyers realizing it was cheaper to build than buy. With recent news from Comcast and Facebook, that may be the case.

Comcast is launching its own streaming box. The Xfinity Flex targets internet-only subscribers of Comcast. The box’s $5 per month rental cost could be a potential deal-breaker for cord-cutters. Programming options could be limited, as Comcast is incentivized to drive subscribers to its upcoming Peacock streaming service.

Facebook is also launching its own streaming device. Facebook’s Portal TV device not only allows users to stream Amazon Prime and other services, but make video calls as well. Cord-cutters may balk at the device’s $149 cost.

Both of these upcoming devices are not slam-dunk competitive threats. But it was enough to scare investors, sending shares down 13.7% alone on Sept. 18. This new hardware competition is on top of existing threats from Alphabet’s Google and Apple. As InvestorPlace contributor Chris Tyler wrote on Sept. 17, Apple’s Apple TV+ may be a game-changer for the tech giant’s streaming strategy.

Despite these risks, investors continue to give ROKU a premium valuation. Even among big tech names shares appear overvalued.

ROKU Stock Price Accounts for Upside Catalysts

Most of the company’s upside is baked into the ROKU stock price. Shares trade at an enterprise value/sales (EV/Sales) ratio of 16.9. This is a substantial premium to Alphabet (EV/Sales of 5), Amazon (EV/Sales of 3.6), and Apple (EV/Sales of about 4). Even the more richly-valued FAANG stocks trade at discounts to ROKU. Facebook’s EV/Sales is 8.6, and Netflix’s is 7.1.

But is this valuation justified? The company continues to be in a hyper-growth phase. Results for the quarter ending June 30, 2019 were solid. Net revenue was up 59% year-over-year. The company added 1.4 million accounts. This bumped its user base up to 30.5 million. They continue to grow average revenue per user (ARPU). Monetization via advertising is ramping up as well.

These growth numbers may justify a premium valuation. But Roku faces a long path to profitability. The company continues to generate breakeven EBITDA. It could be years before monetization turns the company into a cash cow. This potential is largely priced into the Roku stock price, making shares definitely not a value play.

The recent stumble in Roku stock could be the prelude to additional declines in price. The company’s growth story remains solid, but investors realize it’s not a sure thing. With so many players blowing billions into the streaming arms race, building an economic moat is tough.

Bottom Line on ROKU Stock: Wait For a Better Entry Point

In my last analysis, I suggested waiting for lower prices to buy ROKU stock. Of course, the stock skyrocketed in the two months after that article. I remain on the sidelines, even if the company could materially grow in the next few years.

ROKU is having its day in the sun, but the future may not be as bright. The company has managed to outfox Apple and Google. But with their deep pockets and market power, they pose a serious threat. I am skeptical of Comcast’s upcoming streaming box. Cord cutters may resent Comcast using cable-industry tactics (monthly rental charge for the box). Facebook’s product could be a killer, given its integration with their social media services.

All in all, Roku stock is overpriced given these risks. I am not completely bearish on the company’s future share price. Recent developments could be mere hiccup before another rally. But waiting for a better entry point could be the best play to play ROKU. Take your time, and make your move when the price is right.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/new-competition-threatens-roku-stock/.

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