I am not always right, and I almost never recommend momentum stocks.
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But when I called Roku (NASDAQ:) an “interesting speculative play” in June 2018, I was underestimating myself.
If you grabbed some shares at that time, you’ve hit a home run. At that point, ROKU stock price was about $40. Now trading around $170, Roku stock has a market cap of $17.6 billion. That’s more than Discovery Networks (NASDAQ:), and more than CBS (NYSE:).
What’s going on is consumers are shutting down their cable and rushing to embrace streaming, a.k.a, “Netflix (NASDAQ:) and chill.” Roku’s streaming stick, which is at the heart of its TV offerings, is a gatekeeper to this new world. Buy one, plug it into your WiFi, and you can buy all the entertainment you could ever wish for.
Don’t Look at Numbers
If you’re the kind of investor who looks at numbers, however, ROKU made no sense even when I first recommended it.
Roku’s most recent earnings report, delivered July 17, showed
Its revenue was up 59% year-over-year. Its active account total jumped 39%. Revenue from advertising and services, which it calls “platform revenue,” was up a staggering 86%.
Still, why would investors pay 20 times revenue for Roku stock? For the same reason former Microsoft (NASDAQ:) CEO Steve Ballmer paid $2 billion for the Los Angeles Clippers.
The Clippers are one of two NBA franchises in Los Angeles, the nation’s largest market. ROKU is now the largest streaming stick provider, with 39% of the market. Amazon.com (NASDAQ:) has 30% of the sector. Mighty Alphabet (NASDAQ:) and Apple (NASDAQ:) have been left behind, and the market is maturing rapidly.
A Takeover of Roku Looms
Roku’s strength is based on its independence, but even at its present valuation, ROKU is no position to resist a determined acquirer.
Roku’s success makes Comcast (NASDAQ:) and Charter (NASDAQ: irrelevant to their customers. It has left most of the Cloud Czars in the dust. Investors who buy the shares, at any price, suddenly become a gatekeeper to entertainment for a generation. That’s the argument analysts at Market Realist are selling, comparing Roku directly to Netflix.
The comparison sounds valid. ROKU is now roughly where Netflix was 4 years ago, just about to make its turn It doesn’t yet break out international numbers, but its ambitions are obvious. ROKU collects data directly from consumers, which drives its choices on what to offer through its own, ad-supported Roku channel.
On the other hand, streaming is an easy hack. As Roku’s own shareholder letter notes, anyone can easily stream from a game machine like the Microsoft Xbox or the Sony (NYSE:) PlayStation. There are tens of millions of such devices in consumers’ living rooms. Apple, Google and Amazon are all out there, along with Tizen, an open-source project backed by Samsung (OTCMKTS:) and Intel (NASDAQ:).
ROKU is not Netflix. It does not have nearly the control over future streaming that Netflix has.
But it is in a very powerful position. It’s sitting at a poker table with 19 chips, next to players who have hundreds of them, and it has a hand with four aces.
Roku probably has a year or two to cash in its chips, maybe to one of its cable rivals, maybe to Disney (NYSE:), maybe to one of the Cloud Czars. They’re all facing a build-or-buy decision, but when one (or more) decides to spend whatever it takes to take out ROKU, watch out.
Today’s investors are betting that it knows when to cash in.
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 or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT and AMZN.
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