ROKU – AN APPLE A DAY AND ANOTHER BUBBLE TODAY
We are now learning about the launch of Apple TV Plus by AAPL from Bloomberg, who reports that the company is looking at a November debut and a $9.99/month price point after a free trial. Such a move would coincide with the Disney+ launch planned by DIS on 11.12.2019, as AAPL tries to keep pace with changing consumer behavior and the rapidly moving streaming market.
Note that DIS plans to charge $6.99/month for its offering, while the least expensive plans from NFLX and Amazon Prime by AMZN are $8.99/month. Generally speaking, all of these price points are similar in range, so we believe content and technology will differentiate for sustained success after the euphoric land grab in the streaming war market subsides.
If Apple TV Plus comes in at $9.99/month, given the massive scope, scale and following of Apple products by its customers, we predict a quick share take of 30-50 million customers in the video streaming segment, and maybe more if AAPL goes worldwide. We expect millions of these customers to be taken from streaming “incumbents” like ROKU.
Earlier, a Financial Times report noted that AAPL was blowing past its initial $1BN spending estimates for content, passing $6BN and more. Development of content combined with proprietary technology and its own ecosystem will be differentiators for AAPL versus open standards no moat platforms like ROKU.
Separately, yesterday, ROKU shares were bid up on the lack of inclusion of AMZN for the initial Disney+ launch by DIS, as some hold that it will somehow disproportionately benefit the neutral streaming platform provider. As stated by DIS CEO Bob Eiger on its earnings call two weeks ago, the Company is in discussions with AMZN for Disney+ distribution and expects to sign something with them in the future. Since it makes no sense for DIS to not leverage AMZN in some fashion, we predict it is a WHEN not an IF and the recent gains of ROKU on this premise will evaporate as streaming investors sober up to reality.
ROKU shares have reached a level surpassing PRICED TO PERFECTION. We dub current ranges of $15BN market cap, or 15x sales with no profits, with a flat 3Q forecast, no technology moat, and no proprietary content, as PRICED TO DELUSION. A slew of insider selling including significant recent sales by the Company’s CEO at the $100 level, combined with extreme overvaluation of this entity which is simply an aggregator of content and reseller of technology (i.e., a distribution company), prompt us to maintain our STRONG SELL recommendation. Near-term, we look for a retracement to $100 (gapfill post earnings and around where the CEO sold this year). Longer term, given the aforementioned risks, we fairly value ROKU at 2x sales, or about $3BN based on 2020-2021 forecasts + cash or $25/share far below current levels and roughly where the stock traded one year ago.
Disclosure: I am/we are short ROKU.
Additional disclosure: We intend to provide additional commentary in our ongoing coverage of ROKU.