While Roku (ROKU) still has a lot going for it as a company, those positives are arguably priced in at its current valuation.
With the help of a string of very strong earnings reports, Roku's stock has been on a tear in 2019. As of Monday's close, the streaming hardware and platform provider was up 388% on the year and more than 10-fold from its $14 2017 IPO price.
TV+, which will sell for $4.99 per month per household and is being provided for free for a year with the purchase of an Apple device (including Apple TV set-tops), doesn't appear to be a major problem for Roku. As Apple disclosed in March, TV+ will be available not just on Apple devices, but also on devices powered by Roku's platform and Amazon.com's (AMZN) Fire TV platform, as well as Samsung, LG, Sony and Vizio's smart TV platforms.
Moreover, though Apple's willingness to provide a free year of TV+ with hardware purchases does act as a new selling point for Apple TV -- at least unless a consumer has already obtained a free year by buying some other Apple device -- Roku (and for that matter, Amazon) still has a major hardware price advantage. Whereas the Apple TV 4K set-top starts at $179 and the older, less powerful, Apple TV HD starts at $149, Roku's cheapest 4K-capable streaming stick (the Premiere) costs just $40, with a version featuring a voice remote costing $10 more.
In addition, unlike Apple's tvOS, Roku's OS is also now baked into many smart TVs, with the company estimating that more than 1 in 3 smart TVs sold in the U.S. during the first half of 2019 packed its software.
But while the TV+ announcements didn't justify selling off Roku's shares, the company's current $17.4 billion market cap does give some reason for pause. That market cap is equal to more than 15 times the $1.13 billion consensus estimate for Roku's 2020 Platform (software and services) revenue.
Since Roku treats hardware sales as loss leaders aimed at growing the base of consumers it can monetize via ads, transaction cuts and other services -- the company had a hardware gross margin of just 5.5% in Q2 -- it arguably makes more sense to value the company based on a multiple of its Platform revenue, which carries a 60%-plus gross margin, rather than its total revenue. And though it's possible that analyst estimates will prove conservative, a valuation of 15 times next year's expected Platform revenue spells a pretty limited margin of error -- particularly given that Platform revenue is now expected to be up 76% this year and 54% next year.
Even with Amazon's Fire TV platform remaining a formidable rival (especially in Europe), Roku still has a lot of headroom to both grow its user base and better monetize its average user. The company is coming off a Q2 in which its active accounts rose 39% annually to 30.5 million, its streaming hours rose 72% to 9.4 billion and its Platform revenue rose 86% to $167.7 million. And though up 27%, Roku's average revenue per user (ARPU), which is defined as its total Platform revenue over the trailing 12 months divided by its active accounts during that time, was a fairly low $21.07.
Roku's video ad business, which has been seeing its ad impressions grow at a triple-digit annual clip, in particular appears to have a lot of room to grow. On a micro level, this business is benefiting from Roku's strong viewing growth, its requirement that ad-supported channels hand over 30% of their ad inventory to Roku and the strong ad targeting and measurement capabilities it's developing for its platform. On a macro level, ongoing declines in traditional TV viewing (particularly among younger demographics) and the steady growth of online video ad budgets all help Roku's cause over the long run.But the positives that could justify being bullish on a stock at, say, $50 or $75 might not be enough when the stock is flirting with $150. And though I've been bullish on Roku over much of its history as a public company, I think would-be buyers at this juncture should probably wait for a better entry point.