Among the Sharks, Roku Is a Remora, Not a Minnow

Roku (NASDAQ:ROKU) shareholders watched their investment’s impressive two-year run falter in mid-February. At that point, ROKU stock had posted the kind of gains investors dream about: Roku rose by 800% over the course of 24 months. Even better, this was no nerve-racking, Reddit-fueled stock that could collapse as quickly as it vaulted into headlines.

Roku logo displayed on tv screen in modern living room

Source: AhmadDanialZulhilmi / Shutterstock.com

For the past three months, the picture hasn’t been so rosy, with ROKU slumping. However, after delivering a first-quarter earnings report last week that smashed revenue expectations, ROKU stock has rallied.

The Portfolio Grader “B” rated stock isn’t without its challenges. For example, look all around Roku in the streaming market and you’ll see a collection of the some of the world’s largest technology and media giants.

Playing in that company can be dangerous. The big players — and a concern that they will eventually crush it — lead to many of the arguments against Roku. Let’s have a look at two of these challenges, and why I think that despite them, ROKU stock is still a strong, long-term growth pick.

Roku Is at the Mercy of Streaming Services 

One of the advantages of Roku as a platform is that it allows users to watch content through any of the major streaming services. They just click the respective app on their Roku device or Roku TV. If they subscribe to the service via Roku, the company even gets a cut of the subscription fee.

This does leave Roku at risk of losing a service. In April, the YouTube TV app was yanked off Roku as part of a dispute over issues like hardware requirements, data access, and search results.

However, the odds of the streaming giants leaving the platform remain low. Roku has 53.6 million active accounts. The company dominates the U.S. in marketshare for streaming devices in homes, with 37%. In addition, 31% of U.S. homes access their streaming content using smart TVs. Guess what? Roku software is powering 38% of those smart TVs. Any streaming service that decides to exit the Roku platform does so knowing it is going to risk losing a huge number of subscribers.

Roku Can’t Compete on Hardware

Roku was a pioneer in offering standalone video streaming hardware. The company released its first device in 2008. Since then, virtually every tech company has gotten into the video streamer business. However, as noted above, Roku still dominates, despite the competition and the flashy hardware it’s up against. 

Moreover, Roku isn’t particularly concerned about hardware sales, although it continues to do very well against the competition. That business has low margins. Licensing Roku OS to TV manufacturers is an easier (and more profitable) way to expand its reach.

Selling streamers is accounting for a smaller share of the company’s revenue as platform revenue (mostly advertising and licensing) takes off. In the first quarter, hardware accounted for 18.8% of total revenue. That’s down from 27.5% a year ago. In comparison, in Q1 platform revenue was up 101% YoY, and accounted for 81.2% of the company’s net revenue.

Don’t sweat the hardware. ROKU stock growth is far more tied to ARPU (Average Revenue Per User). Keep an eye on that number — which continues on an upward trajectory — and don’t sweat the hardware.

Bottom Line on ROKU Stock 

Several years ago, Roku’s CEO gave an interview to Recode that addressed many of these fears about being a minnow swimming with sharks. I think his summary of the situation sums things up nicely:

“We’re much more focused. All we do is we come to work every day and we think about how to make TV better. Those companies, yes they’re great companies, but they come to work thinking about how can I sell a bunch of shoes, how can I be better at search, how can I sell more phones? TV is on their list but it’s at the bottom of their list.”

It helps to think of it this way. Roku isn’t directly competing against those big streaming video services, at least not head-on. Its strategy of being a platform first means that it actually benefits from the success of video streaming services.

More people interested in streaming video means more people likely to buy a Roku TV. Inevitably, they’ll also watch some of the free content or the Roku Channel, which adds to the company’s ad revenue. The growing Roku platform also means more eyes watching those big streaming services — so they’re not in a rush to crush it.

In the shark metaphor, Roku is more like a remora, co-existing with the sharks in a mutually-beneficial relationship. 

With streaming becoming the dominant way to watch video in the home, the future is bright. So are the long-term growth prospects for ROKU stock.

On the date of publication, Louis Navellier had a long position in ROKU. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

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