Roku (NASDAQ:ROKU) stock has declined about 25% since reaching $179 in September. Concerns about competition have helped drag down Roku stock. The attrition came amid new “plus” streaming content debuts from Apple (NASDAQ:AAPL) and Disney (NYSE:DIS).
As another InvestorPlace columnist, Chris Markoch, pointed out in October, a bunch of huge companies, including Comcast (NASDAQ:CMCSA), and Facebook (NASDAQ:FB), are now viewed as tough competitors for Roku.
But as Markoch noted, when it comes to enabling consumers to access multiple internet TV options, only Roku has discovered an overwhelmingly successful “secret sauce.”
I believe that this is due to multiple factors, including how amazingly easy it is to install and use Roku’s devices and software, along with the fact that the company’s software is now built into most popular TV brands, including Sharp (OTC:SHCAY), TCL, RCA and Hitachi (OTC:HTHIY). It doesn’t hurt that smart TVs have become much cheaper than they were even four or five years ago and are now affordable for most people.
Once a company has discovered a secret sauce and becomes a market leader, it’s often impossible, even for much bigger competitors, to knock them out of the top spot.
Many investors have underestimated the power of market leaders. I was guilty of doing that back in 2012 with a stock called Netflix (NASDAQ:NFLX).
Thompson had said he wanted to make big acquisitions, and, based on hints he dropped in June 2012, I was pretty sure he wanted to acquire Netflix. As a result, I bought some Netflix stock.
We’ll never know if I was right (and how history would have turned out differently if I was) because hedge fund owner Dan Loeb, who wanted Yahoo to take actions that would boost its stock more in the short-term, found out that Thompson had lied about his college degree on his resume. Loeb used that information to push Thomson out of the CEO position.
I sold my Netflix stock because I was sure that much bigger companies like Amazon (NASDAQ:AMZN), CBS, Disney, Apple and Alphabet (NASDAQ:GOOGL) would offer similar services, sharply cutting into Netflix’s market share. That, in turn, would cause Netflix’s stock, which had a high valuation, to tumble, I predicted.
Of course, I was wrong, and Netflix was largely unchallenged for years. Its stock went on to climb by thousands of percentage points.
There are many other similar examples. Once Amazon became the go-to company for e-commerce, nobody could dislodge it. Once Microsoft became the world’s top operating system for PCs, it has kept that title for decades. It doesn’t appear that Google will ever get pushed out of its position as the world’s dominant search engine.
Although one could counter that eBay was briefly more popular than Amazon, and BlackBerry (NYSE:BB) and Nokia (NYSE:NOK) were once the most popular cell phone brands, the top company in a sector more often than not remains top dog for decades.
I believe that all of the internet video companies, other than Netflix, Amazon and Disney, will have to play ball with Roku. (And by playing ball, I mean either pay a lot to advertise on Roku, share a meaningful amount of revenue with it or acquire it). Without a lot of help from Roku, I think it will be very hard for CBS, NBC or even Apple to get many people to watch their online channels.
Moreover, Roku could easily effectively become the cable company of tomorrow, not only for the U.S., but for the world. InvestorPlace contributor Faisal Humayun recently noted that Roku has already entered the U.K., Mexico, and Brazil. It will probably enter many more countries down the road.
American cable companies once brought many stations into the homes of the vast majority of Americans. They still (for the time being) get paid handsomely by station owners, consumers, and advertisers. As the world transitions to internet TV, Roku could adopt a similar model.
Roku Stock Doesn’t Seem Overvalued
Let’s use Comcast as a reference point. Comcast stock has a market cap of over $200 billion. It’s true that Roku doesn’t have a highly lucrative broadband internet business. But Roku does have a widely viewed TV network, The Roku Channel, that, in time, as it spreads around the world, could be twice as valuable as Comcast’s NBC network. Similarly, Roku’s internet video business could eventually be twice as valuable as Comcast’s cable TV business.
For simplicity’s sake, let’s assume that Comcast’s cable TV business, NBC, and its internet business are each worth about a third of its market cap, or $65 billion. That means that the cable TV business and NBC are worth $130 billion together. Put a 2x multiple on that and you end up with $260 billion.
So if Roku does effectively become the cable company for much of the world and the Roku Channel becomes very popular around much of the globe, Roku stock could theoretically one day be worth $260 billion. Today it’s market cap is just shy of $14 billion.
The result of my analysis may sound implausible. But most people would not have believed in 2010 that the market cap of Netflix stock could reach $150 billion in 2020 or that Amazon stock would be worth over $900 billion this year.
In any event, Roku stock doesn’t seem overvalued to me here and now.
As of this writing, the author did not own shares of any of the companies mentioned in this column.