ROKU - Roku

[valueinvestor]

Sold at November 2020 - and it's another 80% gain.

[KJP]

What're your thoughts at $22bln?

 

Roku offers a great product that solves a growing issue. Consumers continue to increase their number of streaming service subscriptions, and Roku offers the platform that connects them w/ ease and in a cost efficient manner. Demand for the product should continue to grow while a consumer's alternative is to use a less intuitive and more expensive smart TV or browse the streaming services on their computer and then connect to a TV. With growing demand and a lack of solid alternatives, I expect Roku to continue to see impressive user growth.

 

Roku makes very little profit from selling the players - they need to drive monetization of the growing user base. Advertising on the platform is the key area for monetization. Ads appear on ad supported channels; I have used Roku TVs many times and have yet to see an ad. Maybe because I only use it for Netflix and HBO. The level of future monetization depends on the effectiveness of the ads, in a world where effectiveness can very easily be quantified. Compare the level of targeting that Roku can offer to a FB/Insta ad.

 

Roku's 40mm and growing user base is undoubtedly very valuable but I am skeptical of how effective ads on ROKU can be. Is the degree of effectiveness from a targeting perspective that dissimilar from a normal TV channel? Consensus estimates for Roku's FY22 user base and ARPU are 73mm and $34 (currently 43mm and $23), resulting in revenue of $2.8bln w/ $203mm in EBITDA. So at today's valuation, we're paying 6.6x EV/Sales and 93.5x EV/EBITDA for consensus FY22 estimates.

 

I began research on ROKU after being impressed w/ the product. After a very in-depth 20 minutes of research on Roku I'm inclined to buy FB. I have a much higher degree of confidence in the value proposition of FB ads compared to Roku's. Consensus estimates for FB DAUs and ARPU for FY22 are 2.0bln (with a B) and $40*. We're paying 12.7x Consensus FY22 EBITDA for an advertising platform that is unmatched in size and targeting effectiveness (insert comment about data privacy here).

 

*20 minutes of research limits me to consensus estimates, sorry. They're both well covered by the street.

 

Now Roku is at $60 billion rather than $22 billion.  I've had a Roku for many years, and use it to search across my streaming subscriptions.  It's UI is also simple enough to use.  But why can't the big broadband companies take this business for themselves with devices like this:  https://www.xfinity.com/learn/flex

 

 

[jschembs]

What're your thoughts at $22bln?

 

Roku offers a great product that solves a growing issue. Consumers continue to increase their number of streaming service subscriptions, and Roku offers the platform that connects them w/ ease and in a cost efficient manner. Demand for the product should continue to grow while a consumer's alternative is to use a less intuitive and more expensive smart TV or browse the streaming services on their computer and then connect to a TV. With growing demand and a lack of solid alternatives, I expect Roku to continue to see impressive user growth.

 

Roku makes very little profit from selling the players - they need to drive monetization of the growing user base. Advertising on the platform is the key area for monetization. Ads appear on ad supported channels; I have used Roku TVs many times and have yet to see an ad. Maybe because I only use it for Netflix and HBO. The level of future monetization depends on the effectiveness of the ads, in a world where effectiveness can very easily be quantified. Compare the level of targeting that Roku can offer to a FB/Insta ad.

 

Roku's 40mm and growing user base is undoubtedly very valuable but I am skeptical of how effective ads on ROKU can be. Is the degree of effectiveness from a targeting perspective that dissimilar from a normal TV channel? Consensus estimates for Roku's FY22 user base and ARPU are 73mm and $34 (currently 43mm and $23), resulting in revenue of $2.8bln w/ $203mm in EBITDA. So at today's valuation, we're paying 6.6x EV/Sales and 93.5x EV/EBITDA for consensus FY22 estimates.

 

I began research on ROKU after being impressed w/ the product. After a very in-depth 20 minutes of research on Roku I'm inclined to buy FB. I have a much higher degree of confidence in the value proposition of FB ads compared to Roku's. Consensus estimates for FB DAUs and ARPU for FY22 are 2.0bln (with a B) and $40*. We're paying 12.7x Consensus FY22 EBITDA for an advertising platform that is unmatched in size and targeting effectiveness (insert comment about data privacy here).

 

*20 minutes of research limits me to consensus estimates, sorry. They're both well covered by the street.

 

Now Roku is at $60 billion rather than $22 billion.  I've had a Roku for many years, and use it to search across my streaming subscriptions.  It's UI is also simple enough to use.  But why can't the big broadband companies take this business for themselves with devices like this:  https://www.xfinity.com/learn/flex

 

Totally agree. Seems that Roku's strategy now is to (a) increasingly flex their muscle as the middleman to extract higher fees from the content providers and (b) build their own content. Both seem very risky relative to their core competency.

 

Anecdotally, we bought a Sony TV w/Android as the OS a year or so ago. Had a Roku stick plugged in, but couldn't get the cords to hide very well, so took it out and tried out the native smart platform in the TV. Frankly haven't noticed a difference in accessing what we would've on Roku, and it's far more seamless of an experience since it's built into the TV / remote.

[aglittell]

What're your thoughts at $22bln?

 

Roku offers a great product that solves a growing issue. Consumers continue to increase their number of streaming service subscriptions, and Roku offers the platform that connects them w/ ease and in a cost efficient manner. Demand for the product should continue to grow while a consumer's alternative is to use a less intuitive and more expensive smart TV or browse the streaming services on their computer and then connect to a TV. With growing demand and a lack of solid alternatives, I expect Roku to continue to see impressive user growth.

 

Roku makes very little profit from selling the players - they need to drive monetization of the growing user base. Advertising on the platform is the key area for monetization. Ads appear on ad supported channels; I have used Roku TVs many times and have yet to see an ad. Maybe because I only use it for Netflix and HBO. The level of future monetization depends on the effectiveness of the ads, in a world where effectiveness can very easily be quantified. Compare the level of targeting that Roku can offer to a FB/Insta ad.

 

Roku's 40mm and growing user base is undoubtedly very valuable but I am skeptical of how effective ads on ROKU can be. Is the degree of effectiveness from a targeting perspective that dissimilar from a normal TV channel? Consensus estimates for Roku's FY22 user base and ARPU are 73mm and $34 (currently 43mm and $23), resulting in revenue of $2.8bln w/ $203mm in EBITDA. So at today's valuation, we're paying 6.6x EV/Sales and 93.5x EV/EBITDA for consensus FY22 estimates.

 

I began research on ROKU after being impressed w/ the product. After a very in-depth 20 minutes of research on Roku I'm inclined to buy FB. I have a much higher degree of confidence in the value proposition of FB ads compared to Roku's. Consensus estimates for FB DAUs and ARPU for FY22 are 2.0bln (with a B) and $40*. We're paying 12.7x Consensus FY22 EBITDA for an advertising platform that is unmatched in size and targeting effectiveness (insert comment about data privacy here).

 

*20 minutes of research limits me to consensus estimates, sorry. They're both well covered by the street.

 

Now Roku is at $60 billion rather than $22 billion.  I've had a Roku for many years, and use it to search across my streaming subscriptions.  It's UI is also simple enough to use.  But why can't the big broadband companies take this business for themselves with devices like this:  https://www.xfinity.com/learn/flex

 

Totally agree. Seems that Roku's strategy now is to (a) increasingly flex their muscle as the middleman to extract higher fees from the content providers and (b) build their own content. Both seem very risky relative to their core competency.

 

Anecdotally, we bought a Sony TV w/Android as the OS a year or so ago. Had a Roku stick plugged in, but couldn't get the cords to hide very well, so took it out and tried out the native smart platform in the TV. Frankly haven't noticed a difference in accessing what we would've on Roku, and it's far more seamless of an experience since it's built into the TV / remote.

 

Certainly has been an impressive run since that post. May have missed the forest for the trees on this one. If they own a good portion of the distribution in the age of streaming it will undoubtedly be a very valuable company. Not sure how much of that isn't priced in currently though.

[KJP]

What're your thoughts at $22bln?

 

Roku offers a great product that solves a growing issue. Consumers continue to increase their number of streaming service subscriptions, and Roku offers the platform that connects them w/ ease and in a cost efficient manner. Demand for the product should continue to grow while a consumer's alternative is to use a less intuitive and more expensive smart TV or browse the streaming services on their computer and then connect to a TV. With growing demand and a lack of solid alternatives, I expect Roku to continue to see impressive user growth.

 

Roku makes very little profit from selling the players - they need to drive monetization of the growing user base. Advertising on the platform is the key area for monetization. Ads appear on ad supported channels; I have used Roku TVs many times and have yet to see an ad. Maybe because I only use it for Netflix and HBO. The level of future monetization depends on the effectiveness of the ads, in a world where effectiveness can very easily be quantified. Compare the level of targeting that Roku can offer to a FB/Insta ad.

 

Roku's 40mm and growing user base is undoubtedly very valuable but I am skeptical of how effective ads on ROKU can be. Is the degree of effectiveness from a targeting perspective that dissimilar from a normal TV channel? Consensus estimates for Roku's FY22 user base and ARPU are 73mm and $34 (currently 43mm and $23), resulting in revenue of $2.8bln w/ $203mm in EBITDA. So at today's valuation, we're paying 6.6x EV/Sales and 93.5x EV/EBITDA for consensus FY22 estimates.

 

I began research on ROKU after being impressed w/ the product. After a very in-depth 20 minutes of research on Roku I'm inclined to buy FB. I have a much higher degree of confidence in the value proposition of FB ads compared to Roku's. Consensus estimates for FB DAUs and ARPU for FY22 are 2.0bln (with a B) and $40*. We're paying 12.7x Consensus FY22 EBITDA for an advertising platform that is unmatched in size and targeting effectiveness (insert comment about data privacy here).

 

*20 minutes of research limits me to consensus estimates, sorry. They're both well covered by the street.

 

Now Roku is at $60 billion rather than $22 billion.  I've had a Roku for many years, and use it to search across my streaming subscriptions.  It's UI is also simple enough to use.  But why can't the big broadband companies take this business for themselves with devices like this:  https://www.xfinity.com/learn/flex

 

This is the type of thing I was suggested cable cos would do to try to supplant Roku:

 

"Comcast has also signalled interest in offering Flex and its X1 tech outside its traditional cable footprint (and beyond its X1 syndication deals with operators such as Cox Communications and Shaw Communications), including the possibility of integrating its technology on smart TVs on a global basis."  [source:  https://www.lightreading.com/cablevideo/comcast-brings-pay-tv-upgrade-option-to-flex/d/d-id/767692?_mc=RSS_LR_EDT]

 

 

 

[rkbabang]

What're your thoughts at $22bln?

 

Roku offers a great product that solves a growing issue. Consumers continue to increase their number of streaming service subscriptions, and Roku offers the platform that connects them w/ ease and in a cost efficient manner. Demand for the product should continue to grow while a consumer's alternative is to use a less intuitive and more expensive smart TV or browse the streaming services on their computer and then connect to a TV. With growing demand and a lack of solid alternatives, I expect Roku to continue to see impressive user growth.

 

Roku makes very little profit from selling the players - they need to drive monetization of the growing user base. Advertising on the platform is the key area for monetization. Ads appear on ad supported channels; I have used Roku TVs many times and have yet to see an ad. Maybe because I only use it for Netflix and HBO. The level of future monetization depends on the effectiveness of the ads, in a world where effectiveness can very easily be quantified. Compare the level of targeting that Roku can offer to a FB/Insta ad.

 

Roku's 40mm and growing user base is undoubtedly very valuable but I am skeptical of how effective ads on ROKU can be. Is the degree of effectiveness from a targeting perspective that dissimilar from a normal TV channel? Consensus estimates for Roku's FY22 user base and ARPU are 73mm and $34 (currently 43mm and $23), resulting in revenue of $2.8bln w/ $203mm in EBITDA. So at today's valuation, we're paying 6.6x EV/Sales and 93.5x EV/EBITDA for consensus FY22 estimates.

 

I began research on ROKU after being impressed w/ the product. After a very in-depth 20 minutes of research on Roku I'm inclined to buy FB. I have a much higher degree of confidence in the value proposition of FB ads compared to Roku's. Consensus estimates for FB DAUs and ARPU for FY22 are 2.0bln (with a B) and $40*. We're paying 12.7x Consensus FY22 EBITDA for an advertising platform that is unmatched in size and targeting effectiveness (insert comment about data privacy here).

 

*20 minutes of research limits me to consensus estimates, sorry. They're both well covered by the street.

 

Now Roku is at $60 billion rather than $22 billion.  I've had a Roku for many years, and use it to search across my streaming subscriptions.  It's UI is also simple enough to use.  But why can't the big broadband companies take this business for themselves with devices like this:  https://www.xfinity.com/learn/flex

 

This is the type of thing I was suggested cable cos would do to try to supplant Roku:

 

"Comcast has also signalled interest in offering Flex and its X1 tech outside its traditional cable footprint (and beyond its X1 syndication deals with operators such as Cox Communications and Shaw Communications), including the possibility of integrating its technology on smart TVs on a global basis."  [source:  https://www.lightreading.com/cablevideo/comcast-brings-pay-tv-upgrade-option-to-flex/d/d-id/767692?_mc=RSS_LR_EDT]

 

The problem I have with this is that cable company equipment (especially comcast) is universally just god awful.  Their cable boxes have always been crap full of bugs, their cable modems are crap, their wifi equipment is crap.  I've had zero problems since I purchased my own modem and router for my house about 4 years ago.  I had nothing but problems when I was using Comcast equipment.  I couldn't imagine ever even trying out an Xfinity branded anything. A TV labeled Xfinity inside would be my reason for not considering it.

 

[dwy000]

Thats very true. But if you have Xfinity broadband and they offer you Flex for free, that's a pretty compelling option vs paying for a Roku as well as ongoing fees.

[KJP]

Yes, Comcast's products haven't been great, and a focused player often wins over a giant conglomerate.  But I'm not the only one that sees Roku is in Comcast's sights:

 

"MoffettNathanson analyst Craig Moffett believes Comcast would be smart to broaden Flex's reach, holding that the operator already has the "right" content partnerships, a US distribution partnership with Cox, and potential to explore in Europe with Sky.

 

He notes that Comcast could secure close to a national footprint for Flex if Charter Communications would play ball. Charter and Comcast have held talks on Flex, but recent comments from Charter CEO Tom Rutledge indicate that those talks are going nowhere as the company instead sizes up the potential for its own Worldbox platform. Then again, this could also be Rutledge just being a shrewd negotiator and playing hard to get.

 

"In a perfect world, Flex would become a second Roku," Moffett explained in a research now following Comcast's Q4 results. "Yes, Flex is financially too small to measure. But the idea that Comcast could organically grow its own Roku is an intriguing idea … They have the right assets, with both the distribution to make it an immediate force and the content relationships to make it differentiated. And it happens to be a good product."

 

And, as noted above, making this about a bigger platform play with a much broader business to underpin it, rather than one focused on a low-margin pay-TV service delivered out of footprint, would help to address the financial shortcomings that Comcast cited just a few years ago."

 

[source:  https://www.lightreading.com/cablevideo/why-time-is-ripe-for-comcast-to-blow-past-its-borders/a/d-id/767723?_mc=RSS_LR_EDT]

[rohitc99]

Thats very true. But if you have Xfinity broadband and they offer you Flex for free, that's a pretty compelling option vs paying for a Roku as well as ongoing fees.

My personal experience is that i would not trust them at all. In the past their practise always has been to bundle stuff up and call something 'free' and then keep raising the price every other month sneakily. i know most others in my area dont trust them at all

[dwy000]

Thats very true. But if you have Xfinity broadband and they offer you Flex for free, that's a pretty compelling option vs paying for a Roku as well as ongoing fees.

My personal experience is that i would not trust them at all. In the past their practise always has been to bundle stuff up and call something 'free' and then keep raising the price every other month sneakily. i know most others in my area dont trust them at all

 

What's there to trust?  They are literally giving you a box for free.  You're not subscribing to anything other than the internet you are already subscribing to (it's only available to Xfinity broadband customers).  If they start to charge or try to bundle streaming services, you are free to decide whether to take it or quit. 

[KJP]

Malone talks briefly about Roku in this podcast posted on another thread by Liberty:  https://overcast.fm/+I5mtwfgfU

 

As he explains, Roku is trying to be a middleman aggregator.  Elsewhere in the interview he mentions that TCI once went to pre-Jobs-second-act Apple and asked them to design a UI for a hardware device they were trying to build because TCI didn't have the design expertise to do it themselves.  I think this is one of the issues Rk was getting at earlier -- any device built by Comcast may be junk compared to what Roku builds.

 

 

 

 

[Jurgis]

Malone talks briefly about Roku in this podcast posted on another thread by Liberty:  https://overcast.fm/+I5mtwfgfU

 

As he explains, Roku is trying to be a middleman aggregator.  Elsewhere in the interview he mentions that TCI once went to pre-Jobs-second-act Apple and asked them to design a UI for a hardware device they were trying to build because TCI didn't have the design expertise to do it themselves.  I think this is one of the issues Rk was getting at earlier -- any device built by Comcast may be junk compared to what Roku builds.

 

IMO Roku UI is quite so-so. But I have not used competitors really.

 

Also "Roku" UI is not really a single UI. Their UI really varies by service. Their Amazon UI is different from Neflix UI different from XXX UI. Some of these are better than others. Most are quirky. E.g. I've somewhat given up on such trivial functionality as rewind, since it's completely broken in at least one of the services and I can't remember in which one. So I've been conditioned as Pavlovian dog not to use it at all even if/when I'd like to rewind a bit.  ::)

 

I don't really have a great solution for this. Remote control UI is very limited in what can be done with it. Speech interface might be attractive, but so far apparently it has not been great. To be honest though I have not used speech interface on Roku (I think some models have it available), Amazon Fire TV Cube or Comcast - both of them have it.

[kab60]

This Company makes a Chromecast of sorts embedded in cheap TV's and is worth a cool 50B? Got it.

 

*takes cover*

[KJP]

Earlier in the thread I suggested cable cos would try to take this business for themselves, but based on its recently filed S-1, Vizio is also unsurprisingly in the mix: https://www.sec.gov/Archives/edgar/data/0001835591/000119312521062802/d87723ds1.htm

 

For those looking for a high-level overview of how these "platforms" currently make money here's a quote from the S-1:

 

Platform+

 

Platform+ is comprised of SmartCast, our award-winning Smart TV operating system, which enables our fully integrated entertainment solution, and Inscape, which powers our data intelligence and services.

 

SmartCast delivers a compelling array of content and applications through an elegant and easy-to-use interface. It supports many of the leading streaming apps, such as Amazon Prime Video, Apple TV+, Disney+, Hulu, Netflix, Peacock and YouTube TV, and hosts our own free, ad-supported apps, WatchFree and VIZIO Free Channels. SmartCast also supports Apple AirPlay 2 and Chromecast functionalities to allow users to stream additional content from their other devices to our Smart TVs. It provides broad support for third-party voice platforms, including Amazon Alexa, Apple HomeKit and Google Voice Assistant, as well as second screen viewing to offer additional interactive features and experiences.

 

Our proprietary Inscape technology enables ACR, which identifies most content displayed on the Smart TV screen regardless of the input. We aggregate this viewing data to increase transparency and enhance targeting abilities for our advertisers. Additionally, we are a leader in driving the innovation and development of Dynamic Ad Insertion (DAI). We launched Project OAR (Open, Accessible, Ready), an industry consortium working directly with many of the largest television networks to establish a technology standard to advance the adoption of DAI and addressable advertising. The adoption of our DAI technology is in its early stages and is an example of our innovation in the marketplace.

 

We monetize Platform+ through several avenues:

 

Advertising

 

 

  •   Ad-supported Video on Demand (AVOD): Ad inventory on services such as WatchFree, VIZIO Free Channels and certain third-party AVOD services

 

 

  •   Home screen: Ad placements on the SmartCast home screen

 

 

  •   Partner marketing: Images of content and available apps on our television cartons

 

 

 

Data licensing

 

 

  •   Inscape: Data licensing fees from ad technology companies, ad agencies and networks to aid ad buying decisions or to enable DAI capabilities

 

Content distribution, transactions and promotion

 

 

  •   Subscription Video on Demand (SVOD) and Virtual Multichannel Video Programming Distributor (vMVPD): Revenue shared by SVOD and vMVPD services on new user subscriptions activated or reactivated through our platform

 

 

  •   Premium Video on Demand (PVOD) and Transaction Video on Demand (TVOD): Revenue shared by PVOD and TVOD services for purchases made on our platform

 

 

  •   Branded buttons on remote controls: Dedicated shortcuts for content providers

[KJP]

More on competition in this space:  https://www.lightreading.com/cablevideo/roku-must-ladder-up-to-original-content-to-stay-competitive---analyst-/d/d-id/767927?_mc=RSS_LR_EDT

 

You've got:

 

(1) the TV manufacturers (LG, Samsung, Vizio) developing their own OS's to keep this "platform" for themselves;

(2) Other companies offering their OSs to TV manufacturers (Google, LG, potentially Comcast); and

(3) Other streaming devices that run their own OSs (Google, Amazon, Apple, Comcast)

 

It will be interesting to see how this market develops. 

[dwy000]

I just struggle to see the moat here.  They have no proprietary content and no discernable edge in aggregating content.  Definitely first mover advantage but that isn't enough when others have greater connectivity to the customer.

[KJP]

I just struggle to see the moat here.  They have no proprietary content and no discernable edge in aggregating content.  Definitely first mover advantage but that isn't enough when others have greater connectivity to the customer.

 

I'm also struggling to see any moat here.  I could envision three possibilities:

 

1) You successfully aggregate the end consumer by providing them a differentiated product that they demand, thereby forcing your OS onto TV manufacturers or bypassing them via your own device.  But I don't see the Roku customer experience as being significantly different than anything else. 

 

2) You create a big default headstart by getting your OS installed on all (or most TVs).  But manufacturers have an incentive to build their own OS "platform" and there is competition from other third-party OS, e.g., AndroidTV.  So how do you preserve your economics while also getting your OS onto most TVs?

 

3) You could lock up content by getting exclusivity from important streaming apps, but there is no chance that Netflix, Hulu, Amazon Prime, Disney+, etc., are granting Roku exclusivity. 

 

So, at the end of the day, how do they win here?  One way, I suppose, is that TV OS is all they do, while it's a rounding error to businesses as large as Amazon, Google, etc.  So, perhaps focus on product quality might ultimately win the day.

[market malocclusion]

My first impression of Roku is a company disembarking the pandemic wave, trading at a disproportionate 130% higher against a one-off revenue increase of 75% and a one-off jump in subscribers of 42%.  Add in forthcoming dilutive equity offerings and equity compensation, I'm not sure that the Nielson alliance will provide enough revenue to support current multiples.

I have to look deeper at the company's prospects, but I'm tempted to bet on declines as shares trade above the 330 level.  Even after favorably adjusting earnings and cash flow, with over 100 million shares outstanding, the company is trading at three-figure multiples to the money it's generating - and (I think) the multiples have expanded since before the pandemic.  The company must spend massively on R&D and marketing, so I'm not sure it can ever "grow into" its multiples. 

It seems like the company is bound to return to its less dizzying pre-pandemic multiples, which I roughly estimate would bring it back below 300 - but maybe the massive drop from February is enough to even this out for some time to come.  

On the other hand, Roku definitely has some strong qualities.  I understand that Roku remains the leader in the OTT marketplace, and it may have increased market share during the pandemic, and Roku has proven its mettle as a pioneer in this space.  Furthermore, I understand that the OTT market may have significant room to grow going forward.  

There is a great deal of ongoing hype around tech and particularly Roku, and perhaps they hype is at least somewhat well-founded.  Some companies just perpetually bask in the multiple-magnifying energy of investor enthusiasm.

Maybe I'll resist the urge to be a contrarian on this one.