The Real Story That is Driving ROKU Stock

It’s been a rough month for Roku (NASDAQ:ROKU) stock. Since September 9, the ROKU stock price is down over 37%. This volatility includes a 20% plunge on a single day, September 20, following an unfavorable report from an analyst that covers the stock.

Despite a precipitous drop, ROKU stock is stronger than you might think.
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However, investors are getting steered away from ROKU by what I believe is a lot of noise about increasing competition. And one analyst firm believes there’s an even bigger misunderstanding taking place regarding the company’s profit outlook. Let’s take a closer look at what’s really going on with ROKU and ROKU stock.

Analysts are Panicking about Increased Competition

The streaming war is heating up. Apple (NASDAQ:AAPL) is launching Apple TV+, Disney (NYSE:DIS) is releasing Disney+, AT&T (NYSE:T) is coming out with yet another offering, AT&T TV. All told, streaming has gone way beyond Netflix (NASDAQ:NFLX) and Hulu.

However, while many consumers cut the cord, they still like the viewing experience they get from their television — and the bigger the better. And that means they need some way of viewing their streaming content.

This means the streaming device space is also becoming more crowded. For example, Comcast (NASDAQ:CMCSA) is offering their Xfinity Flex streaming box for free to their internet-only subscribers. And Facebook (NASDAQ:FB) is hoping the launch of their Portal TV will be more successful the second time around.

This has analysts concerned about Roku’s growth. They shouldn’t be.

Roku Is not Netflix

Many analysts are using Netflix as a cautionary tale for Roku. The concern is that just as Netflix stock is getting beaten up by competition on the content side of this trend, Roku will lose customers to these new devices.

However, streaming content and streaming devices are two different businesses entirely. Roku has had competitors for years including Amazon (NASDAQ:AMZN) with their Fire TV Stick and Apple (with Apple TV). And Roku has not only been competing, they’ve been winning. In the process, they’ve established a niche market that includes over 30 million subscribers. This is because, according to Tom Forte, an analyst at D.A. Davidson, 20% of U.S. television households had Roku-empowered sets in 2018.

And that means that Roku is not as dependent on hardware sales to be a driver of their profit. They can instead rake in the advertising revenue. Ad revenue is a much more profitable side of the business than device sales and accounted for 86% of their profit last quarter.

The reality is that Netflix is in jeopardy in the streaming war because it is losing the content they had to license from other sources. If you want to watch The Office, you’re only going to be able to watch it on one streaming platform. However, you can watch that streaming platform on many devices. And if consumers already have Roku, they’re less likely to switch, and certainly not to pay for something else.

Roku has Built a Moat Through Strategic Partnerships

In addition to the popularity of their standalone devices, Roku has partnerships with smart TV manufacturers such as Sharp (OTCMKTS:SHCAY) and Philips (NYSE:PHG). This allows the company to license its technology directly into these devices.

Mark Zgutowicz, an analyst with Rosenblatt Securites said, “Roku’s top streaming brand status carries significant clout in streaming TV purchase decisions, which has enabled it to significantly outsell Amazon Fire TV to date.”

And Roku has also partnered with ONN to create two ONN projectors specifically built for Roku. The models are available at Walmart (NYSE:WMT) starting at $179.99.

Not only are Roku devices competitively priced, they are consistently rated as one of the best devices from the tech media such as Wired, Wirecutter, and CNET. Consumers have three options. They can use the Streaming Stick+ or their stand-alone Ultra model. ROKU also provides software that works with many Smart TVs.

Will ROKU Be Profitable?

Putting the issue of competition aside, another issue facing ROKU stock is based on accounting. When using generally accepted accounting principles (GAAP) and other accepted accounting policies, ROKU’s return on assets (ROA) is negative.

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Source: Altimetry

But at least one company sees a much different story for Roku. Altimetry is the consumer arm of Valens Research. They describe themselves as “a boutique financial research and publishing firm that provides individual investors with unique, unbiased investment recommendations and analytics.” Altimetry specializes in uniform accounting which strips away distortions such as lease capitalization versus expensing, treatment of good will, and excess cash.

Based on their analysis, the story for ROKU looks very different.

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Source: Source: JYE Financial, unless otherwise indicated

Based on these metrics, Roku not only looks profitable now, but also looks to be profitable in the future. And when you look at a chart that goes further back, Altimetry points out that uniform accounting shows ROKU has been profitable for as long as it has been publicly traded.

What’s Next for ROKU Stock?

The reality is that ROKU stock may have further to fall. With the new streaming services coming online, the company may miss out on some of the new customers who are entering the streaming space. But I don’t think it will miss that much.

The question for streaming providers is not capturing new eyeballs but convincing the eyeballs that exist to choose their streaming service over others. Roku is agnostic about the streaming service its customers use and that will serve it well.

As of this writing Chris Markoch did not hold a position in any of the aforementioned securities.

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