Widely-followed short-seller Citron used be one of the biggest bears on streaming platform provider Roku Inc (NASDAQ: ROKU ). Back when Roku stock was soaring towards $50 after its first earnings report as a publicly traded company, Citron was pounding on the table that the stock would trade back down to the upper-$20s. (Check out this interesting back-and-forth between Citron's Andrew Left and Needham's Laura Martin).
That is no longer the case.
Citron has flipped from bear to bull on Roku, saying that "everything has changed" about the stock.
What exactly is everything? According to Citron, Roku is a pure-play on the Over the Top (OTT) mega-trend. The valuation on Roku stock in the mid-$30s does not appropriately reflect the company's supercharged growth prospects.
Is Citron right? Should you buy Roku stock here and now?
I'm not convinced. As such, I'm sticking with my original thesis that this is a "wait-and-see" situation.
Here's a deeper look:
Why Citron Is (Partially) Right About Roku Stock
The bull thesis on Roku stock is as follows.
The adoption of OTT media services is a mega-trend which cannot be stopped. OTT services are often cheaper, offer enhanced convenience, and are on-demand. Because of this, everyone in the world is going OTT.
This is best seen with the hyper-growth of Netflix, Inc. (NASDAQ: NFLX ). But everyone else is also going OTT, too.
Facebook Inc (NASDAQ: FB ) built out Watch. Alphabet Inc (NASDAQ: GOOG )(NASDAQ: GOOGL ) has YouTube. Amazon.com, Inc. (NASDAQ: AMZN ) offers streaming video services. Walt Disney Co (NYSE: DIS ) is prepping a big streaming launch. AT&T Inc. (NYSE: T ) is growing DirecTV Now.
As all of these OTT services emerge, there needs to be an aggregator of these services so that consumers can sit on their couch and easily switch between YouTube, Netflix, and DirecTV Now. Preferably, that aggregator is content-neutral so no one OTT service is highlighted over the other.
This is where Roku steps in. Although there is a lot of competition in the space of aggregating OTT services, Roku is the only content-neutral player. Its competitors - Alphabet, Amazon, and Apple Inc. (NASDAQ: AAPL ) - all have some skin in the OTT content game.
Because of this, Roku is positioned to be the go-to, content-neutral OTT service aggregator in the future. Consequently, the company in five to 10 years will look much like what a cable provider looks like today.
If you play this scenario out, it is reasonable to say Roku stock is worth over $50 today. (See the math here ).
The Bull Thesis Ignores Competition
The aforementioned bull thesis, however, is incomplete without discussing why competition could derail the growth narrative.
Firstly, the whole bull thesis on Roku is built on one critical assumption: That content neutrality is an important thing for OTT service aggregation. This assumption makes sense. After all, Google would naturally be inclined to promote YouTube with Chromecast.
But that currently isn't the case. A Chromecast owner can just as easily stream Netflix as a Roku owner. There really isn't any discernible difference. So long as there isn't any discernible difference, the competitive threat will loom large. Bigger players like Apple, Alphabet, and Amazon can pour money into their OTT platforms, and easily dominate this market if content-neutrality really isn't that important.
After all, Roku only has 21 million accounts. That really isn't all that big - Netflix has 125 million subs.
Secondly, the bull thesis on Roku also ignores the fact that these streaming players are just one part of the multi-faceted smart home ecosystem. Apple, Alphabet, and Amazon are building out their smart home ecosystems, namely through artificial intelligence-enabled voice assistants. Roku doesn't have anything outside of its streaming player, nor does it have the resources to build AI-enabled devices on par with big-tech players.
Consequently, as the smart market matures and voice assistants integrate with streaming players, Roku could get left in the dust.
All together, competitive risks cloud the long-term bull thesis on Roku stock.
Bottom Line on ROKU Stock
If this is the next Netflix, investors can afford to wait for more clarity. Buying here seems unnecessarily risky considering the big valuation, huge volatility, and over-arching competitive concerns.
As of this writing, Luke Lango was long FB, GOOG, AMZN, DIS, T, and AAPL.
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