Roku - Here Come The Giants

Sep. 19, 2019 7:35 AM ETRoku, Inc. (ROKU)AAPL, AMZN, CMCSA, META, GOOG
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Contributor Since 2019

Former WSJ and II ranked sell-side analyst covering special situations and TMT.


  • Yesterday, ROKU shares were hammered on news of Comcast launching free equipment for Flex streaming to Internet customers and Facebook's plans to offer streaming video to its 2BN daily users.
  • The news comes on the heels of Apple's imminent launch of streaming and continued growth at Amazon's Firestick business and Google's own streaming platform which is building steam.
  • The moves by these giants, all of which are giving away equipment or services to acquire or retain customers, calls into question all estimates for ROKU's growth.
  • The Company's valuation has been boosted by irresponsible analyst upgrades with targets of $150-$180, as recently as yesterday laughably, which calls for doubling of ROKU's 30.5MM users and ARPU of $20-$25.
  • There is no scenario now where ROKU can grow its business with this juggernaut of entrants moving into the market.  A streaming bloodbath is about to occur and the victim will be independent ROKU.  Reiterate STRONG SELL.

A streaming bloodbath is about to occur.  Well capitalized multi-billion dollar companies such as AAPL, CMCSA and FB want the market, and are now giving away equipment outright or subsidizing its cost to end users by offering free or discounted services such as AMZN giving two months of HBO to Firestick buyers and GOOG sending weekly coupons for movie and content to its own dongle/Android customers.

The moves by these giants, all of which are giving away equipment or services to buy or retain customers, call into question estimates for ROKU's growth.  We predict ROKU will guide down when it reports its next quarter, which may be flat/down % YoY growth in 2020-2021 and continued and increasing losses while it tries to fight competitor equipment subsidies.

Even in a perfect sustained high growth model, where ROKU owned its technology and had access to a differentiated content package, its stock should only be valued at 10x forward revenues.  In that scenario, 10x 2020E revenues of $1BN = $10BN / 120MM shares generates a valuation of $83 per share today.

But ROKU does not fit that mold.  The Company's platform is Linux-based, easily copied and offers no proprietary content versus the crowd of giants now in the stadium.  Further, ROKU's own next quarter guidance calls for flat sequential top and bottom line performance.  We predict the moves by these giants will result in a flat or negative growth scenario for ROKU in 2020-2021, which would destroy the hopes and dreams of Wall Street pied pipers calling for ROKU to hit $150-$180 per share or up to a $20BN valuation for ROKU (20x-25x sales).

ROKU is now a broken stock that is becoming a broken story.  The CEO, who recently unloaded a sizable block of stock at $100+, did get one other thing right besides his stock sale.  ROKU, which means "SIX" in Japanese, is now the sixth player in a crowded stadium staring down huge multi-product multi-service global companies that wants its base.  Barring some Hail Mary deal with another player that wants to invest in its book of business for market entry, ROKU is now a fringe player.  

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, 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 reiterate our STRONG SELL recommendation. Near-term, we look for a retracement to $100 (gapfill post earnings). 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.  With that said, we don't believe Street estimates, suggesting even more downside for ROKU long-term.

Disclosure: I am/we are short ROKU.

Additional disclosure: Next up, we will explore ROKU's technology platform and terms of service, which illustrate it is sniffing customer's home broadband networks and selling usage data to advertisers and the Chinese government.

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