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Roku Stock Will Be an Unstoppable Behemoth for This Key Reason

Dana Blankenhorn

Shares in Roku (NASDAQ:ROKU) stock rose over 20% after earnings forced analysts to reset their expectations for the streaming hardware company.

Roku Stock Will Be an Unstoppable Behemoth for This Key Reason

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Roku lost $10.4 million for the quarter ending in June, but analysts were more interested in its growth and what it implies for the future.

Revenue was up 59% year-over-year to $250 million. But $167.7 million of that was “platform revenue,” ads and other services delivered to existing Roku owners. The margins on that business are 65%, against just 5% from selling players. Roku is becoming a sustainable business and could become a wildly profitable one.

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Roku’s new title is the one it has sought since its founding: gateway to the streaming world.

ROKU Out-Amazoning Amazon

The business model for Roku is similar to that of the Amazon (NASDAQ:AMZN) Fire Stick. Offer something for nothing, then offer everything else.

In the case of Amazon, this is its Prime Video service, which comes with its $10-per-month free shipping plan. In the case of Roku it’s an ad-based, free streaming service.

More important, consumers now trust Roku more than Amazon. It now has 43% of the connected TV market against just 18% for Amazon. TVs, in turn, represent 55% of streaming hours. What it means is that Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), with its Chromecast, and Apple (NASDAQ:AAPL), with its Apple TV, are now marginal players.

Tech markets are notoriously sticky. It’s not so much getting there first that matters but getting there first with the most. Once a niche scales, market leadership can be impossible to dislodge. That’s why AT&T (NYSE:T) is no longer in the cloud, and why International Business Machines (NYSE:IBM) is no longer in PCs.

The implications of this are staggering, which is why Roku’s market cap of $13.6 billion represents almost 14 times this year’s expected revenue. It’s also why Variety covered the company’s earnings.

Roku’s Choice

Roku is choosing to focus on maintaining credibility with its audience, limiting ads on its TV channel. It lacks the cash to create a competitor to Amazon’s Alexa or Apple’s Siri.

Despite owning a service, Roku is portraying itself as neutral in the coming streaming wars. Roku says it will offer all services, advertise them, and just take a cut of the initial sale. It’s also calling itself a privacy advocate, a trustworthy place for consumers to leave their streaming data.

How long it can hold itself above the market in this way is an open question. Any of the major players in either technology or entertainment —  AT&T, Comcast (NASDAQ:CMCSA), Apple, Alphabet or even Microsoft (NASDAQ:MSFT) — could force its sale with the equivalent of seat-cushion money.

That’s why the most interesting Roku news of this week may be its alliance with Walmart (NYSE:WMT). New Roku products will be introduced in Walmart stores under a Walmart brand. Given Walmart’s ambitions against Amazon, that’s yet-another player in the mix once the bidding for Roku gets serious.

The Bottom Line on Roku Stock

The Roku stock price is beyond any concept of fundamental value.

But given its prospects, it is not out of line. Roku has created a gigantic market share in a scaled market, a market that looks set to dominate TV in the next decade.

Roku has a target on its back, but it’s not the one you think. Leads like this are only lost when a company spends outrageous amounts of money or truly builds a better mousetrap. Streaming technology is a commodity.

The target Roku has on its back is from every other streaming player eyeing its success and preparing to bid for it. That’s why the stock’s price is now so outrageous. Roku doesn’t know it, but it’s for sale.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL and MSFT.

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