Roku: Biggest Hurdle Coming Soon

Summary

• IPO lockup expiration comes in last week of March.
• Class A share count could soar from here.
• Will insiders take profits on the huge run?

While shares are well off their all-time highs, streaming media player Roku (NASDAQ:ROKU) has been one of tech's better stories since going public last September. A strong first earnings report sent shares soaring as seen in the chart below, and the company's growth prospects remain quite strong. In the near term, the stock's biggest hurdle is coming soon, when insiders can start cashing out after the IPO lockup expiration date hits.

(Source: Yahoo! Finance)

Like most newer tech firms, Roku has two classes of shares, which primarily allows founders and early investors to have substantial voting control. There are the Class A shares, which trade publicly, and contain one voting right per share. Also, there are Class B shares, which do not trade, but contain 10 voting rights per share.

As you can see in the chart below, shares outstanding for Class A, originally proposed to be about 15.7 million, are already getting close to 20 million. That number will rise naturally thanks to stock-based compensation, but also if Class B shareholders decide to convert. According to Nasdaq, the 180-day lockup period expiration is March 27th.

(Source: Roku 10-K filing and amended S-1 filing; *Was based on underwriters not exercising option to purchase more shares.)

The reason why this situation is so interesting is because the 10-K filing showed just under 80 million Class B shares. That means a ton of potential dilution for Class A investors, even if only a small percentage of those shares are converted in the near term. Some insiders might want to lock in a profit, while others might just sell for personal liquidity or other reasons. When you have an IPO at $14 and a stock now at $40, I wouldn't blame executives, other insiders, or early holders for selling.

Interestingly enough, there are obviously a bunch of investors or traders that either are betting on the lockup expiration being a major event, or perhaps they just don't believe in Roku's story/valuation. As you can see in the table below, short interest has remained very high for a company with less than 20 million shares outstanding, and a float that's even less according to Yahoo.

(Source: Nasdaq Roku short interest page)

We are just about three weeks away from Roku facing its biggest hurdle to date as a public company. Once the 180-day IPO lockup expires, tens of millions of shares become available to be sold, which could cause insiders to convert and take profits on their gains. Of course, they don't want to flood the market and crash the stock, but with an IPO that's done extremely well, investors should be aware that a good amount of dilution is likely coming.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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