LOS GATOS (CNN) — Roku could be in trouble. Competition from much bigger companies is coming to the streaming market, and investors are bailing out of the Los Gatos-based company’s stock.
Shares of Roku, after a huge run up this year, plunged nearly 20% Friday after an analyst issued an extremely gloomy report. Roku stock was up 1% on Monday. The stock has now lost a third of its value since Apple unveiled its streaming service, Apple TV+, would cost only $4.99 a month. Roku’s stock is about 40% below its all-time high on September 9.
Investors are increasingly worried about how Roku will be able to compete with the new Portal TV streaming device from Facebook as well as the Comcast Xfinity Flex streaming box, which the cable company plans to give for free to its broadband internet customers.
All of a sudden, there are lot more options for over the top, or OTT, streaming media services. In many ways, the challenges facing Roku are similar to those Netflix faces: Rivals are coming from everywhere.
“We see dramatically more competition emerging that will likely drive the cost of OTT devices to zero and put material pressure on advertising revenue,” said Jeffrey Wlodarczak, an analyst with Pivotal Research Group, in a report Friday.
Too much competition for Roku?
Wlodarczak’s report helped spark Friday’s massive sell-off. He slapped the stock with a “sell” rating on Roku and a $60 price target, or 55% below where it closed on Thursday. The somewhat hyperbolic title of his report didn’t help matters: “Is ROKU BROKU?”
The steep slide in Roku appears to be bringing back memories of how TiVo was once viewed as a leader in the digital video recorder market — until cable companies started bundling in their own DVR technology with set-top boxes.
Yet Roku’s stock is still up a whopping 250% this year. That means there could be a lot more room for it to fall. Roku is not expected to be profitable this year or in 2020. Shares trade at the nosebleed price of more than 385 times 2021 earnings estimates. So even if you believe Roku will be a long-term streaming winner, the current stock price may simply be too high.
This “elevated valuation” — along with “whiffs of more competitors coming into the fray” — are reasons why SunTrust Robinson Humphrey analyst Matthew Thornton said in a report last week that he still has a “hold” rating on the stock.
The bull case for Roku
Still, others on Wall Street are far more optimistic about Roku’s future.
“Many new services are playing catchup in a crowded market,” said Oppenheimer analyst Jason Helfstein in a report last week.
Mark Zgutowicz, an analyst with Rosenblatt Securities, also said in a report late last week that investors were overreacting to the fears of more competition — particularly from Comcast.
Zgutowicz noted that only a small number of Comcast customers subscribe to the broadband only plan. Comcast tellingly did not make its new Xfinity Flex service available to customers who also have cable TV plans with the company. Zgutowicz added that he thinks Roku customers will remain loyal to the company, pointing out that Roku has already had to contend with competition from much larger rivals, most notably Amazon.
Roku also has partnerships with key manufacturers such as Sharp, Sanyo, Magnavox and Philips to license its technology directly into many of their smart TVs.
“Roku’s top streaming brand status carries significant clout in streaming TV purchase decisions, which has enabled it to significantly outsell Amazon Fire TV to date,” Zgutowicz said.
Don’t forget advertising
Tom Forte, an analyst at D.A. Davidson, added in a report that one out of every five American TV households in 2018 had Roku-empowered sets.
For that reason, Roku — which now has more than 30 million active subscribers — is far less reliant on sales of its actual devices than you might think. The real money is in advertising revenue.
Roku’s so-called platform unit (i.e. ad sales) accounted for two-thirds of overall revenue in its most recent quarter. Sales in that division surged 86% from a year ago compared to just a 24% jump on the player side of the business. Profit margins are also substantially higher for ads than hardware.
“Roku should benefit from the secular trend of advertising dollars leaving linear TV in favor of OTT platforms,” Oppenheimer’s Helfstein said.
Apple, Disney and many other media companies, including CNN and HBO parent AT&T, are all launching subscription services, but Roku may still be able to benefit from the overarching trend away from traditional cable TV and towards streaming TV networks.
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