Roku (NASDAQ:ROKU) stock is off to a choppy start in 2020. After jumping out of the gates up nearly 5%, ROKU has given back those gains and then some. At present, the ROKU stock price sits about 3% down for the year. The stock is also down nearly 30% from its all-time high set in September of last year.
The prevailing point of view on ROKU stock is that it is destined for greatness. Streaming will continue to thrive in any economy. And as my colleague Luke Lango wrote, ROKU will rise above any current valuation concerns.
But I’m not the traditional Roku customer. And that makes it somewhat difficult to get my mind around the meteoric rise of Roku stock. I know what Roku does. I consider myself an organized person so having a one-stop (or click) service for all my streaming services would be desirable.
But again, I’m not the traditional Roku customer. And that gives me an opportunity to be a little more dispassionate about ROKU stock. I think human nature is both a blessing and a curse for Roku. But before I dive too deeply into that, I have a confession to make.
Confession of a Former Cord Cutter
About 18 months ago, I joined millions of consumers in “cutting the cord.” I ditched DirecTV and got my television fix through Hulu and Netflix (NASDAQ:NFLX). But that was during late spring and summer. When football season drew near, I discovered that there was only one way I could watch my hometown NFL team. That was the NFL Sunday Ticket through, wait for it, DirecTV.
Just that fast, I was sucked back in. But I quickly discovered it wasn’t just the NFL and my unrequited love for the Cleveland Browns. It was live sports in general. That is the one area where streaming isn’t a “killer app,” at least not now.
This isn’t a flaw of Roku. It’s merely a limitation. But it’s a fairly significant limitation from the perspective of someone like me who is not your traditional Roku customer. Roku customers spend an average of nearly 3.5 hours (3.47 to be exact) on the platform. If I weren’t watching a live sporting event, I might not watch 3.5 hours of television for several days.
Can 32 Million Consumers Be Wrong?
Roku has a base of just over 32 million active accounts. That number increased 36% in 2019. That’s a lot of streaming sticks and smart TVs. These are the vessels through which consumers “receive” Roku, which is really just an app.
But there’s also that 3.5-hour per day engagement number. It seems unlikely to expect that number to go up, but that’s kind of like people saying the market is due for a correction. Streaming usage will increase until it doesn’t and not a second before that.
And, to be completely accurate, Roku has initiated its own streaming service. But it has no original content which makes it unlikely to be a serious competitor of other streaming services, at least for now.
That being said, when a stock like Roku rises over 350% in one year, it seems almost impossible to believe that there won’t be a correction. But 32 million people may have something to say about that.
I’d feel better, however, if Roku had a true moat for its service. But it doesn’t. Amazon (NASDAQ:AMZN) is a direct competitor. And their Fire TV boasts 40 million users.
Free Has a Value
That leads me to another quandary I have with Roku. It’s free, mostly. A consumer has to buy a device, either a streaming stick or a smart TV that is Roku enabled. But that’s a sunken cost. Once a user has the device, Roku is the vessel to access their library of streaming services, but they don’t necessarily get any additional revenue from the consumer.
The vast majority of the rest of Roku’s revenue comes from advertising. This is where the bulls make their greatest case. Think of it like this. As consumers are cutting the cord, they are tethering themselves to Roku. Roku makes it easy for consumers to access and organize the streaming content they get across all platforms.
But free has a value. Or rather, it doesn’t. That means users will continue to use Roku because a service hasn’t arrived that gives them a value that goes beyond price. But there’s nothing to prevent that from happening. Amazon doesn’t charge anything for consumers to set up an account, but there is exclusive content available only to Prime members (a $99 cost to the consumer).
The Final Word on Roku Stock
It’s unrealistic to expect Roku stock to deliver another 350% gain in 2020. But with an active user base that is only increasing and engagement numbers rising, it’s likely to be another good year.
And who knows? ROKU may be the next Amazon. Sometimes it’s hard to see the next new thing until it’s already here.
That same statement, however, gets me wondering about Roku stock. This is not a 2020 concern, and it may not be a concern for several years, if at all. But technology is constantly changing. So, for those that are investing in Roku, you’ll want to keep an eye on it.
Because again, it’s hard to see the next new thing until you’re staring right at it.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
