This year we’ve seen high-profile flubs with tech IPOs like Snap Inc (NYSE:SNAP) and Blue Apron Holdings Inc (NYSE:APRN). But this hasn’t been a problem for the Roku Inc (NASDAQ:ROKU) IPO. The company priced its offering at $14, which was at the top of the range, and the shares are up nearly 54% to $21 in early trading, which puts the valuation at roughly $2 billion. The underwriters on the Roku IPO include Morgan Stanley, Citigroup and Allen & Co.
So with all the hype is there still an opportunity here?
Before we answer that, let me give you a quick background of the company, as it will help put things into perspective. While the roots of Roku go back to 2002, it did not get much traction until its involvement with Netflix, Inc. (NASDAQ:NFLX), which did not want to build its own video player.
So NFLX invested $6 million in the company. Interestingly, a year later it would divest its interest so as to avoid conflicts with other hardware operators that were popping up.
While Netflix continues to represent the largest amount of the video traffic — about a third — ROKU has been aggressive in expanding the platform. That is, a player provides access to a rich assortment of content from companies like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Hulu and Time Warner Inc’s (NYSE:TWX) HBO.
As of now, ROKU is the largest player in the market, with 15.1 million active accounts. In fact, for the first half of this year, the company’s users streamed over 6.7 billion hours, up by 62% on a year-over-year basis.
And in terms of the financials, the top-line continues to grow at a robust rate — although, it has been falling during the past couple years. For 2017, revenues have increased 23% to $162.3. Although, ROKU has continued to post losses, which came to $24.2 million during the period.
Roku and the Megatrend of Streaming
Over the past few years, the large media companies like Walt Disney Co (NYSE:DIS), Viacom, Inc. (NASDAQ:VIAB) and CBS Corporation (NYSE:CBS) have scrambled to deal with the relentless trend of “chord cutting” and video streaming. According to research from comScore, about 51 million U.S. homes have used Over The Top (OTT) services. And it seems like a good bet that the trend will continue. A report from Ovum predicts that OTT revenues will hit $60 billion by 2022, up from $32 billion in 2016.
Here’s how ROKU puts it in the S-1: “Consumers win with TV streaming — they get a better user experience, more entertainment options and more control over what they spend on content. When users want to enjoy streaming entertainment, they start at the Roku home screen where we put users first by helping them find the content they want to watch.”
There is something else that is important to keep in mind: The company is not only about hardware sales. Rather, it has added new channels, such as licensing, advertising and subscriptions. These have been the drivers for growth.
Bottom Line On the ROKU IPO
There are certainly risk factors with the ROKU IPO. After all, the competition is intense. ROKU must fight against rivals like Apple Inc. (NASDAQ:AAPL), GOOGL and AMZN.
But perhaps the biggest issue — at least for the short-term — is the dynamics of the IPO market. When a company makes a debut, the expectations usually get out-of-whack. So if the earnings reports fall short, there can be heavy losses for shareholders. This is what happened with SNAP.
In other words, when looking at the ROKU IPO, the best approach is probably to be patient. Chances are pretty good that — once the hype subsides and the shares get seasoned in the market — you will get a better price.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
