It is hard for the last two days to have gone any better for Roku Inc (NASDAQ:ROKU). since its IPO debuted on Thursday. On the first day, it stock shot up almost 70 percent, closing at $23.50 compared to its initial price point of $14. And on Friday, the stock shot up even more, nearly reaching $30 in the morning before closing at $26.54 at the end of the day. CNBC reported that Roku’s debut was “the highest single day return for a US IPO in 2017" and that investors may be encouraged in the tech IPO market “tech flops like Snap and Blue Apron this year.”
But investors with longer memories will remember that Snap’s IPO performed very well in the opening stretches, only to falter as concerns about its lack of profitability and ability to compete with larger companies loomed larger. Roku has to face these problems as well. According to its SEC report, the company had a net loss of $40.6 million in the 2015 fiscal year followed by a loss of $42.7 million in 2016. And many investors are seriously worried about Roku’s ability to compete with the giants of Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOGL), all of whom are in a similar field.
Roku’s stock as it is right now is probably too high and there will be an eventual correction. But that inevitable fall in the share price does not mean that Roku is doomed to fail in the long term. Roku’s interest in transitioning from selling hardware to becoming a platform provider is a good sign, and there are reasons to believe that Roku can find a niche and remain a solid company.
Not Just Selling Players
Roku sells streaming players which lets customers hook up Netflix (NASDAQ:NFLX) and Hulu to their televisions. The first Roku streaming devices were first released in 20008, and Roku is today the market leader in streaming devices despite competition from Amazon Fire TV and the Apple TV. In fact, Business Insider reported in August that Roku had actually managed to increase its share of the streaming device market from 2016 to 2017, jumping from 30 to 37 percent. Roku’s advantages are its cheaper price and lack of dependency on Netflix.
But while Roku has been successful so far, investors are rightfully concerned about its ability to stay competitive, especially with Amazon. Amazon could easily shrink the price of its devices to hurt Roku’s bottom line, and the two companies are competing for low-end TV manufacturers. Ad in fact, Roku’s revenue from streaming players in the first six months of 2017 dropped compared to the same period in 2016 as it has to keep costs low in order to compete.
If Roku was totally dependent on its streaming players after investing in a signal boosterand had no pipeline for future products, this company would be in serious trouble. But Roku is betting not on its streaming players, but on advertising and licensing revenues which it describes as its platform revenue. Roku’s platform revenue has risen from $43 million in the first half of 2016 to $82 million a year later, and is making up a larger part of the business.
Becoming Profitable?
In other tech IPOs like Snap, this would be the part where I point out that the company despite high revenue growth has no real path towards profitability and thus discredit it. But while Roku’s overall revenue growth is only okay and it is losing money, it has a clear idea of how to become profitable. Platform and advertising revenue generally has a much higher margin compared to streaming players, which is precisely why this is Roku’s fixation.
And while Roku may be worried about competition, it could also become an opportunity as Amazon and Apple will likely be more focused on fighting each other than the smaller Roku. Roku could use its status as a neutral player and large share in the streaming market to get better terms from content providers, becoming the tech IPO which actually becomes profitable.
Long Term Potential
In the current hype which surrounds such a strongly performing IPO, investors should stay far away from Roku. Some financial analysts are already questioning Roku’s long-term prospects, its ability to develop its platform system, and the stock price will is going to fall from this current surge. And when it falls, there will be plenty of investors who use it as evidence that Roku is doomed to fail.
But there are other numbers which will be far more important. Roku will be releasing its third quarter report numbers soon, which should indicate whether it is succeeding in increasing its platform revenue and whether it is making progress towards becoming a profitable number. And later in the year, investors will want to see whether there will be in the number of Roku customers as should be expected in the holiday season.
There is a good deal to like about Roku, and investors should not assume that it will just be stomped underneath by its bigger rivals. But for the moment, wait for more information.