I bought Roku for the first time today. I’ve always been interested in the company, but I try to avoid buying stocks trading at 30x sales unless the stock is flawless (see Shopify). I had some concerns about Roku, so I set it aside for the time.
Some News Developments
Since June, Roku has been on a bit of a rough ride. Earnings have been stellar, but the news cycle has been rough. Below are a few of the items beating Roku down:
- Amazon producing their own TV
- Google suing Roku
- Supply chain constraints
All of this led to a 33% reduction in Roku’s share price. I felt that the majority of the narrative around Roku was short-term focused, so I decided to dive back in. What I found looked a lot like Spotify.
How Roku and Spotify are Similar?
- Both companies are middle men who aggregated massive demand
- Roku did this via low cost, high quality hardware that disrupted linear TV
- Spotify did this via low cost, high quality streaming that disrupted the music industry
- Both companies had poor margins
- Roku has low margins on it’s players, which made up the majority of their sales (this is changing… fast!)
- Spotify has low margins due to royalty structures
- Both companies face massive competion from Google, Amazon and Apple
- Microsoft is the sleeping giant that hasn’t competed with Roku
- Both companies have out executed the mega tech companies
- Both companies have shown past optionality and have signs of future optionality
- Both companies disrupted massive industries via streaming
Both Roku and Spotify face intense competition from the mega tech companies (Google, Amazon and Apple).
Where Roku Beats Spotify
I don’t need to profess my love for Spotify here again, but Roku does have several advantages over Spotify.
- Hardware – Roku has trojan horse’d their way into beautiful margins. Spotify doesn’t have this hardware advantage
- Financials – Roku not only has growing margins, they also have expanding
- Leverage – Spotify has to worry about public sentiment driven by artists. The public doesn’t care if Roku sticks it to HBO during a negotiation.
What Does this All Mean?
I definitely have a type. Great businesses with industry tailwinds, reasonable valuations, emerging optionality and ran through a gauntlet of competition.
Roku has monetized in ways the market never thought was possible. Spotify hopes to do the same, but at the same time, it feels early for Roku. I am still concerned about buying a stock at this high of a valuation (I’m a worrywart), but I love what Roku is doing with the Roku Channel and I think their platform is ready and ripe for future optionality.