Netflix stock had an epic crash after its latest earnings release. It lost over one-third of its value in a matter of days. Roku shares fell in sympathy, just not as much.
Maybe they should have. Roku’s growth is slowing for the same reason as Netflix — streaming competition. Every entertainment company in the world is trying to get through the streaming door, but it’s clear we don’t have time for them all.
We have other things to do.
Rise of Cloud Gaming
My kids almost never watch TV. They’re grown now, but they still focus their time on video games. So do their peers.
Gaming is now twice as big as streaming. Netflix hopes to capture a piece of the market with mobile games, and already has 25 million subscribers. But that’s a drop in the market bucket. About 2.7 billion people worldwide are in the gaming market.
Roku, which launched with streaming hardware, now brings in over 80% of revenue from its platform. This includes advertising on streamed cable networks and its own Roku channel. That was fueling growth of 51%, year over year, in the third quarter. More growth comes from deals with TV makers.
Roku is now the fifth most-popular streamer. It is buying assets in Los Angeles like a Hollywood mogul. Its latest fall puts Roku’s market cap slightly behind that of ViacomCBS (NASDAQ:VIAC), owners of CBS, the Viacom cable channels, and the Paramount movie studio.
Just as Roku shares began falling, CFO Steve Louden said he was pleased about the coming “streaming consolidation.” Now it looks like Roku could be a victim of it, with Comcast (NASDAQ:CMCSA), Walt Disney (NYSE:DIS) and Discovery (NASDAQ:DISCA) all circling it.
The Limit of Time
One thing I saw long ago is that the limit to streaming growth isn’t money, but time. Viewer time is what the streamers are chasing, and that time is leaking away into gaming.
The real Götterdämmerung for the streamers was Microsoft’s (NASDAQ:MSFT) decision to buy Activision Blizzard (NASDAQ:ATVI). Cloud gaming, in which Microsoft competes with all the other Cloud Czars, is where the market for time is heading. Companies like Roku don’t have a prayer of becoming major players, as they’re all just one-tenth as valuable, which is why those values are crashing.
What Happens Next?
What most analysts see coming is a wave of mergers among the various streamers, and a sharp cut in programming budgets. I see streamers desperately looking to get into gaming, and willing to sell the family silver to do it.
What would Roku’s streaming technology, and access to customers, be worth to a company like Roblox (NYSE:RBLX) or Electronic Arts (NASDAQ:EA)? What would a big streamer be willing to pay for Take Two Interactive (NASDAQ:TTWO), whose market cap is similar to Roku’s and ViacomCBS?
Bottom Line on ROKU Stock
ROKU stock investors need to realize the way to excitement lies through gaming, and the way to new intellectual property for gaming lies in the streamers.
All this is merging into what is called the metaverse. The “smallest” of the Cloud Czars, Meta Platforms (NASDAQ:FB), formerly Facebook, is putting most of its $29 billion-34 billion 2022 capital budget into software that can connect those dots. The budget is 50% more than Roku is worth.
Investors looking at consolidation were looking in the wrong direction. It’s in the game. That’s where investors should be looking to play this year. Roku’s value lies in its customer connections, not its content.
On the date of publication, Dana Blankenhorn held a long position in FUBO and MSFT. 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 Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.