Roku (NASDAQ:ROKU) stock was one of the stars of the 2020 stock market. In 2021 it’s a dud, down 3%.
Roku continues to grow and continues to make money. The problem is the market sees future weakness and growing competition.
Roku stock has been notoriously volatile in 2021, twice jumping to over $450 a share, twice plunging below $300. It’s just over $320 now, with a market cap of $43 billion on what should be 2021 revenue about $2.8 billion. Even at its low ebb, Roku is not a cheap stock.
The question for investors is whether Roku founder Anthony Wood can pull another growth rabbit out of his hat.
Wood, an unassuming Texas A&M graduate who looks like a basement tinkerer, created his streaming stick after his first invention, ReplayTV, was surpassed by TiVo. The TiVo device was a digital video recorder that sat in your living room. The Roku stick is a DVR that lives in the cloud. Because it lives in the cloud, it also streams TV, including live shows. It moved TV viewing from cable to the internet.
For years, Roku’s investor pitch was that was switching from being a hardware company to an ad network. As its second quarter report shows, Roku now brings in twice as much from its “platform” as from the “player.” That second quarter report crashed the stock, thanks to tight hardware margins and less streaming.
Summer will end and people will go back to watching TV. The problem is that Roku is beset by huge competitors on every side. Its biggest problem is Amazon (NASDAQ:AMZN), whose Fire stick is competitive with Roku in the U.S. market, and beats it handily outside. Wood is now expanding into Europe but is well behind.
Roku’s short-term answers to its difficulty look like minor tweaks. Its new software makes it a full cable replacement, streaming over 200 channels as well as its ad-supported Roku channel. For the holidays it’s expanding advertising under the tag line “OK, Roku does that.”
The campaign highlights the revolution Roku streaming has created. Companies like ViacomCBS (NASDAQ:VIAC), which once controlled viewers through broadcasting and cable networks, no longer have that control. (Roku is now worth almost twice as much as ViacomCBS.) Neither do cable operators like Comcast (NASDAQ:CMCSA), which are struggling to get streaming customers.
The Bottom Line for ROKU Stock
The simplest solution, for Wall Street, would be for Wood to sell out.
If Roku were available Comcast might be a buyer. So might Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), which is an also-ran in the streaming stick wars. Or Apple (NASDAQ:AAPL), which could easily afford the $50 billion price tag. If Wood even said he were open to a sale, the stock would jump quickly.
But Wood is still in his mid-50s and has no desire to retire. He owns 27% of the common stock. He controls the voting stock. While he may dress like he just fell off a turnip truck he was born in Manchester, England. Do not underestimate him.
For Wood, any transaction would leave him in charge of his company. That doesn’t look possible in the big ego world of media and technology. As I wrote in August, if you’re buying Roku, you’re betting on Wood. That has been a good bet up to now. Will it still be one in 2022? I suspect it will.
On the date of publication, Dana Blankenhorn held long positions in AMZN and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.