It was bound to happen at some point and Federal Reserve Chair Jerome Powell did the honors. After several weeks of a disconnect between rising equity prices and terrible economic numbers, Powell finally deflated sentiment with a stark warning about the challenges ahead. That was enough to send shares of most companies down, including streaming equipment provider Roku (NASDAQ:ROKU). Although Roku stock gained previously on the hostage audience thesis, it wasn’t so lucky on Wednesday.
But that wasn’t the only setback that hurt shares. Mostly, Wall Street took a dim view on Roku stock because of the underlying company’s recent prospectus, which revealed management’s decision to enter an equity distribution agreement. In it, Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) will assist in selling shares via an “at-the-market” offering. The agreement has a maximum limit of four million shares.
Naturally, this is dilutive for current shareholders, which on the surface isn’t what you want right now. With so much red ink circulating throughout the markets, investors are obviously looking for viable growth opportunities.
But in the long run, I don’t necessarily view this as a bad move for ROKU. Primarily, management is working from a position of relative strength. For example, Roku stock clawed its way back to slightly above parity earlier this month. That’s something few publicly traded companies can say about their equity value.
Further, streaming is a very hot commodity in the current landscape. The best example here is Netflix (NASDAQ:NFLX), which has gone ballistic since mid-March. With few entertainment options available, most people turned to streaming. Organically, this benefited ROKU. Thus, management might as well strike while the iron is hot.
Permanent Shift to Streaming Will Bolster Roku Stock
But in the years to come, I believe that investors will look back on this equity distribution agreement as a blip on the radar. What will likely drive Roku stock is a transition to streaming that was happening well before the novel coronavirus entered the picture. Really, this pandemic only accelerated this narrative.
First, traditional (linear) TV products are expensive compared to streaming options. Typically, linear TV consumers will find themselves paying for channels for which they have no interest. On the other hand, streaming allows you to purchase only the content you want. Better yet, with on-demand capabilities, you can choose when to watch them.
Second, the coronavirus distinctly put linear TV providers at a disadvantage. One of the biggest drivers for corded platforms was easy access to live sports. But during the shelter-in-place orders, all major sports leagues shut down. Although these leagues are now plotting a return to the field of play, negotiations will be very tricky.
Invariably, whatever course professional sports takes, there will be zero fans in the stadiums. That is going to look very weird for fans, even from a TV viewer’s perspective. Given such a neutered product, it’s possible that many people may turn back to streaming. This would probably see Roku stock enjoying another rally at linear TV’s expense.
Third, Americans made a very pronounced switch to streaming during the forced quarantines. According to a Nielsen report, we streamed 85% more minutes of video content in March on a year-over-year basis. That is a dramatic shift that only something like a pandemic could accomplish.
Essentially, ROKU received a stunning marketing campaign for free. So, whatever they hope to accomplish with their equity distribution agreement, it’s all gravy.
Economic Problems May Be a Surprising Catalyst
As you know, 20.5 million Americans found themselves out of work last month. Many more could join their ranks in the months ahead. Ordinarily, such dire circumstances would bode poorly for entertainment names like Roku stock. But thanks to the underlying technology, that might not be the case this time around.
My thinking is this. In a bull market, households could spend freely due to a lack of fiscal pressure. Some might have both corded and uncorded options to get the advantages of both. But in this volatile economy, families need to watch every dollar going out. That means showing the door to linear TV.
Nevertheless, entertainment is more important than ever, primarily as a coping mechanism. Therefore, consumers will elect the lowest-cost option, which would of course involve Roku’s free ad-support channel. That would attract advertisers, who are now looking to get the most bang for their buck.
Ultimately, I wouldn’t let nearer-term hiccups distract you. As we work through this unprecedented crisis, the big pieces are falling favorably for Roku stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
