Roku (NASDAQ:ROKU) has always tried to play a neutral role among a host of empires. The streaming-stick provider sells itself as a Switzerland of streaming, offering whatever you want to watch and adding its own ad-supported streaming service free to the bundle.
But as “World War Streaming” heats up, this isn’t good enough for the big boys. They don’t want Roku to talk, they want it to die. Before anyone thinks of bidding for the prize, they want to knock it down and see if it bounces back.
So far, it has bounced back. The stock fell from nearly $170 per share to just over $100 during September, then from $148 to $120 in November. But, it opened for trade Dec. 12 at $144.73, with a market capitalization of $16.4 billion on trailing-year revenue of under $1 billion.
Subscriber Numbers Count
For investors, Roku has always been a game of Whose Line is it Anyway, the old game show. Everything’s improvised and the numbers don’t count.
That’s because, while Roku is a piece of technology, it’s a very cheap one. Streaming dongles cost just $25 or so each. For Roku the key metrics have not been stick sales, but the number of accounts and platform revenue. In the third quarter these came in at 32.3 million and $179.3 million. The latter grew 79% from the previous year.
By comparison, Netflix (NASDAQ:NFLX) had 60.6 million paying U.S. members at the end of the third quarter. Amazon (NASDAQ:AMZN) has more than 100 million on its Prime plan, but that’s free shipping, not just TV. Cloud companies like Amazon are unlikely bidders, because like Apple (NASDAQ:AAPL), they can build a Roku and its market share. Amazon already has.
For all their bluster, AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and Disney (NYSE:DIS) are so far behind Roku and Netflix as to be out of sight. Disney bragged last month of having 10 million members, after putting Disney+ on sale at $6, and making it part of a bundle with Hulu and ESPN+ at Netflix’s price. AT&T’s HBO Now has 5 million subscribers. Comcast has yet to launch its free “Peacock” network to its cable subscribers.
Who Might Bid
What Roku offers an acquirer is that 30 million membership figure, plus distribution in TV sets by Walmart (NYSE:WMT) and others. Walmart itself shouldn’t be discounted as a possible buyer. Its Vudu service has yet to take flight — it’s been negotiating with other services to broker memberships.
For any of these big players, Roku would be seat-cushion money at its current market cap. The only big streamer whose value puts it out of the running is ViacomCBS (NASDAQ:VIAC), with a market cap of $23.4 billion. Netflix is worth $130 billion, Comcast $190 billion, AT&T $280 billion and Walmart $339 billion.
Roku has never put itself up for auction, but over 60% of the stock is held by institutions.
The Bottom Line on Roku
The question, for an investor, becomes one of timing. When do you want to get in, how much loss do you wish to risk and what do you think the winning bid might be? Roku continues to act like a bid is not happening, recently paying $150 million for Dataxu, an advertising sales platform. But that just makes it more attractive.
When Roku next reports earnings, analysts expect a loss of 14 cents per share on revenue of $391 million. That would be a doubling of the third quarter’s revenue, because heavy sales of Roku-equipped TVs are expected under trees this month.
My view on Roku is you buy it as a speculation on growth, but keep it for the inevitable take-out. Whatever its current valuation is where the bidding starts, not where it ends.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law , essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and AMZN.