Even though I don’t regularly invest in IPO’s, I keep a watch on ones I think are interesting.
Here’s one I am thinking about.
• Roku (ROKU) is the market leader for internet TV devices with 37% market share. This is the same as last year and up from 33% two years ago.
• Apple is in second with 15% market share; down from 19% two years ago.
• Google’s chromecast slipped to 14% market share; down from 18% a year earlier and 21% two years ago.
• Of all households with broadband internet, 40% own a TV streaming device; up from 6% in 2010.
Roku’s origin story
Roku has an interesting origin story.
From a 2013 article in Fast Company:
Roku began life inside Netflix as project Griffin. Netflix wanted to build a player that subscribers could hook up to their TV to stream movies and TV shows from the web.
Netflix believed it could fundamentally change how the company delivered content to its customers, who were used to waiting days for DVDs to arrive by mail.
In December 2007, the device was weeks away from launching and Netflix CEO Reed Hastings was having serious second thoughts.
The problem? Hastings realized that if Netflix shipped its own hardware, it would complicate potential partnerships with other hardware makers. “Reed said to me one day, ‘I want to be able to call Steve Jobs and talk to him about putting Netflix on Apple TV,’” recalls one high-level source. “‘But if I’m making my own hardware, Steve’s not going to take my call.’”
In the end, Hastings decided to spin the company out into a sperate entity called “Roku”.
The pivot to software
Roku is known for their hardware (TV streaming devices), but for the first time in the company’s history, they made more money from its platform business, which includes TV software and advertising, than from hardware through sales of its connected TV device.
Why it matters
• The shift to OTT(over the top) is a secular trend as companies like Roku are starting to attract advertising dollars that were once the sole property of linear TV.
• Software is a better business than hardware; it scales better and the margins are fatter.
• Advertisers follow eyeballs. Roku has 21 million active users. More than half of those users have cut the cord or never subscribed to pay TV. This should give them leverage in negations when advertisers realize that linear TV is in secular decline and they need to put dollars to work at scale.
(click to enlarge)
They are up over 180% since their IPO in October of 2017, but down 24% from their post-IPO high.
I like category leaders and Roku falls into that bucket. In addition, they have a secular trend (the move to OTT) at their back.
Some facts to monitor as time goes on:
• Will the shift to OTT continue or will TV regroup and regain lost market share?
• Can Roku maintain their leadership position in internet TV devices if Amazon, Apple, and Google put more effort into their products?
• It’s hard to be world class and maintain leadership in one category such as hardware. Can Roku build out and maintain a software business that offers advertisers a differentiated product? Not sure…
If you have any insight or thoughts on Roku, please let me know.
If you armed the best Apple analyst with Tim Cook’s(Apple CEO) private dashboard, what would that be worth?
An interesting question indeed. Patrick O’Shaughnessy sits down with Michael Reece, the chief data scientist for Neuberger Berman.
Their topic? The use of data in the investment process.
Well worth your time.
Have a great day,