16 Aug ROKU – Update. Sell ROKU
Roku: Holders of ROKU should sell into any strength
ROKU reported earnings 2 weeks ago and stated their viewers watched 1 billion fewer hours of digital content on its platform in the second quarter. To make matters worse, Roku is not losing money on it popular media players.
Roku has been a great investment for us for some time. Unfortunately for shareholders, the streaming media business is evolving and Roku’s straglehold is coming to an end.
At one end of the spectrum Alphabet (GOOGL) and Amazon.com (AMZN) have decided to price their hardware offerings ultra-aggressively. The new $50 Google TV dongle has been a huge hit with tech reviewers and users alike. The Amazon Fire TV is fully integrated with the Alexa voice activated ecosystem. It is also the most popular streaming device platform in the country.
The other big competitor is Samsung. Smart TV Plus is a completely free streaming service built into every Samsung smart TV. It’s like Roku, except without a dongle, wires and a learning curve. During the second quarter Protocolreported that Samsung quietly launched the service on the web, too.
In a letter to shareholders Roku managers blame the end of lockdowns for the decline in streaming hours. They argue the choice to absorb rising component costs, resulting in negative 5.9% margins for new media players, was an effort to insulate consumers.
Don’t believe it. If demand was stronger they would have raised prices.
According to a story at Variety, analysts at Morgan Stanley expected active accounts at Roku to reach 56.2 million during Q2. The reported number was only 55.1 million.
The situation is not going to improve any time soon.
The era when cord cutters needed a Roku is begin streaming is over. Google and Amazon devices bring all of the functionality, lower costs and integration with large ecosystems that include home automation. Samsung simply added a software layer to its best-selling TVs.
Roku reported Wednesday that revues grew to $645 million in Q2, a gain of 81% year-over-year. It is not enough to save Roku as the hits just keep coming for this company.
TCL is a long time hardware partner with Roku. TCL used to ship Roku boxes with all of their TVs. Last week TCL executives announced new versions of their TVs would feature Google TV. Officially, TCL are not abandoning Roku. Older specification sets will still carry ROKU.
The problem for ROKU is TCL will price their older specification TV with ROKU box at the same point as their latest technology with Google TV. It isn’t hard to see which version will be the best seller.
ROKU’s response – they went out and acquired new content. Specifically 1,500 episodes of This Old House, the 1990’s home improvement show. Good luck with that.
The bottom line is that Roku’s business is under attack from a variety of ambitious, well-funded technology giants. These competitors have better software, more money and a bigger vision for the future of streaming media.
The TCL news is only the beginning of this process. Much more bad news is ahead for Roku shareholders. Investors should use strength to close positions.