Roku Ready – Updated

We sent out the ROKU notes below on September 27th but are providing a few UPDATES here:

“Splitting the difference” turned out to be about right – it suggested $20/share and that’s where ROKU settled the first day of trading. Since then it’s moved up a bit more to $23. There are some reasons to be cautious.

An author we follow on Seeking Alpha wrote an intriguing post about “The Postage Scale Problem” which probes whether some of the success of Roku has come from the ability to illegally stream content via “private channels.” Roku had to shut this down and replace it with their own “Roku Channel” which hasn’t gone over so well. It’s not clear how this will impact their business but it’s an underappreciated facet of the story.

Finally, Ben Thompson at Stratechery revisits the Roku backstory (it was once part of Netflix and Reed Hastings decided to spin it off rather than launch it.) Ben notes that in many ways “a bet on Roku is a bet against Netflix.” His content is subscription only but highly recommended.

My own reflection of Roku is that their story is really one about better digital advertising. Despite the early success and total domination of Google for search advertising – general digital advertising remains is a shambles of missed opportunity. For some reason serving relevant and effective digital ads is much harder than anyone imagined.

Original Note:

Roku has chosen an exciting time for their IPO – not in terms of the market which remains good but because they are at a crossroads in their business. If you have been to a Best Buy or bought a new TV lately you have probably heard of Roku. Their “box” allows your TV to access content on the internet or “Over The Top” AKA “OTT.” OTT content can be accessed without going through a traditional cable TV set-top box or dare I say it, an antenna.

Roku is not alone – they are surrounded by Apple TV, Amazon (Fire TV) and Google (Chromecast). Much to their credit though Roku is the leader in terms of users and has executed well against the big guys. Roku counts 15M active users. The figures below include less active users but Roku has a slight lead. We’ve got a few issues with these numbers but we will revisit that later.