Roku Inc (NASDAQ:ROKU) has come off a successful initial public offering (IPO) in late September. So far, ROKU stock has sustained a value well above the IPO price of $14 per share since its introduction. Now, investors wonder what’s next for the stock.
The company has built reliable revenue streams and, so far, it holds up against its competitors.
Still, a timeline for profitability and the strategic moves of its competitors make the stock’s future uncertain. Roku is adept at avoiding buffering issues when customers stream a movie. If ROKU stock starts buffering, the company may be less prepared to help. Hence, investors who want to avoid rebooting their portfolios should avoid this stock.
Roku Is Well Positioned in the Streaming Market
The streaming services Roku facilitates are here to stay. Weary of increasing costs and wary of the offerings traditional TV services provide, consumers are cutting the cord in record numbers. This has hurt the likes of AT&T Inc. (NYSE:T) and Comcast Corporation (NASDAQ:CMCSA). The choices and low costs offered by services such as Netflix, Inc. (NASDAQ:NFLX) have become too compelling to ignore.
Roku has positioned itself as the largest facilitator of streaming services. The company accounts for about 48% of streaming players in use, according to Neilsen. The company’s business plan follows one that has been successful in other technology-related industries. It sells its equipment at a low cost. Consequently, the company derives about 75% of its profits from advertising and content distribution.
Weak Financials Loom Over ROKU
The ROKU stock price today stands at approximately $22-per-share, even as the euphoria from its September IPO fades. But, despite the stock price, its financial metrics appear weak. The stock is plagued by negative operating margins, negative free cash flow, increasing liabilities compared with assets and a negative return on assets (ROA).
On the positive side, revenues have grown at over 20% per year. Still, the relative stagnation of the ROKU stock price indicates that revenue growth may not be able to sustain its growth.
Bottom Line on ROKU Stock
Fundamentals are not the only concern. The much larger issue that can sink ROKU stock is the lack of a moat. In other words, the stock does not have a barrier to protect its market share and it profits from competitors.
The fact that many devices can stream media presents a competitive threat. Consumers often use the Xbox, a the gaming console manufactured by Microsoft Corporation (NASDAQ:MSFT), as a streaming device. Additionally, more companies now understand the success of Roku’s business model. As a result, larger competitors, namely Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL) offer competing products.
The deep pockets of these large competitors also pose a threat. If so motivated, any of these rivals could make a more aggressive push to move ahead of Roku technologically. They could also choose to cut the price or even give away Amazon TV Fire Sticks or Apple TV with added features to lure customers away.
Additionally, each of these companies has the ability to buy out Roku. The stock has a market capitalization of about $2.25 billion. Even at a buyout price of $3 billion or $4 billion, those amounts represent a fraction of the cash reserves for each of Roku’s large competitors. While this result would benefit a current holder of ROKU stock, a buyout is not guaranteed.
Although the company offers a great product and a revenue-generating business plan, profitability and competitive challenges make ROKU a stock to avoid. So far, Roku has done a great job capitalizing on internet-based movies and entertainment. Nonetheless, with high-level competition and no visible path to profitability, it’s hard to see a way forward for the stock without a buyout. Consequently, investors are better off buying Roku equipment for entertainment purposes and streaming their gains elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
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