As the major streaming companies continue to see explosive user growth thanks to stay-at-home restrictions, is now the time to invest in Roku?
As the world slowly comes back to life, some stay-at-home business leaders have still managed to retain their status and market leaders, such as Teladoc (NYSE: TDOC), Zoom (NASDAQ: ZM), and Slack (NYSE: WORK), to name a few.
One of the big winners from this change in lifestyle worldwide has been Netflix (NASDAQ: NFLX), which surpassed 192 million subscribers in Q2 and continues to grow. Likewise, Disney (NYSE: DIS) — despite a litany of separate issues — has seen its streaming service Disney+ hit 100 million paid users. Other content providers such as Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) are also reporting jumps in their streamed offerings, and amidst all this growth, Roku (NASDAQ: ROKU) has been quietly riding the coattails of streaming success.
So, is now the right time to invest in Roku?
The bull case for Roku
Streaming is in, cable TV is out. Total user losses for major pay-TV operators in 2019 came to 6 million, allowing streaming video subscribers to surpass cable for the first time, according to The Motion Picture Association of America (MPAA). As COVID-19 rages and people turn to Netflix and Disney for their entertainment needs, Roku stands to gain a lot from riding the wave of a global movement that shows no signs of slowing down.
Roku provides a brand-agnostic streaming service, meaning that you can access your Netflix, Disney, Apple, Hulu, and whoever else you like in one convenient place. Increased usage in the sector allowed Roku to reach 39.8 million accounts in Q1 2020, a 37% increase year-over-year. This comes on top of revenue of $321 million, up 55% since last year as hardware sales and account creation jumped. This non-ad-based revenue increase comes at a welcome time as many advertisers pulled slots due to the pandemic. However, pre-pandemic ad-revenue was growing rapidly, increasing 78% in 2019 to hit $740 million, which has helped see Roku stock jump almost 40% in the past year.
Another bullish reason to invest in Roku is its massive international opportunity. Having seen great success in the U.S., Roku decided to expand into Europe and Latin America last year, where it is in the early stages of growth. The global video streaming market is expected to be worth $687.2 billion by 2024, meaning a CAGR of 18.8% from 2019–2024. This leaves plenty of space for Roku to take a hold of as it is not restricted to any one service.
The bear case for Roku
Being the best in the business does not make you invincible. Just look at Ford (NYSE: F) and General Motors (NYSE: GM); once the kings of car manufacturing, the pair are now dwarfed by Tesla (NASDAQ: TSLA) alone. Roku’s main competition includes Amazon’s Fire Stick, Apple TV, and Google’s (NASDAQ: GOOG) Chromecast. With more and more old-world businesses opting to go streaming, the likes of Comcast (NYSE: CMSCA) or AT&T (NYSE: T) have also invested in their own direct-to-consumer, brand-agnostic boxes. Suddenly, the market is looking quite saturated for Roku, which has yet to become profitable.
Like many companies recently, Roku has also had a hard time of keeping costs down. Its spending outlook for 2020 was already higher than expected before the coronavirus hit, and now it will be forced to shore itself up against decreased ad-revenue. The company has been forced to pull guidance, but was expecting to see a net loss of between $160 million and $180 million in 2020. Recent dips in stock price have probably made Roku’s price more favorable for investors, but should losses begin to widen, the company will need to rethink its strategy in order to return a profit fast.
So, should I buy Roku stock?
Though the coronavirus has made the future uncertain for many, Roku is in a unique position of being able to thrive during the pandemic as more people opt for streaming. The sector appears to be largely immune to the virus’ effects, and while Big Tech might pose a threat, Roku has a first-mover advantage. Roku is very good at what it does, and although it only does one thing really well, sometimes that is all that is required. Streaming is only going to rise, while cable TV declines, and throughout that journey, Roku will continue to accelerate in the industry’s slipstream.
Roku will report its Q2 results after the bell on August 5.
Roku streaming players start at just $29.99, and Roku TVs are available from a variety of TV manufacturers at affordable prices.
Roku has not declared or paid cash dividends on its common stock and the company does not anticipate any cash dividends for the foreseeable future.
No, Netflix does not own Roku. However, founder Anthony Wood was a VP at Netflix before starting Roku and Netflix was an early investor.
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