Billion Dollar Unicorns: Roku Streams a Successful IPO, for Now

According to a an eMarketer report published earlier this year, nearly 38.9 million viewers in the US would have streamed a video program at least once a month this year using Roku. The number of users for Roku are estimated to have grown 19% over the year this year. Alphabet’s Chromecast and Amazon’s Fire TV are close competitors with Chromecast expected at 36.9 million users and Amazon at 35.8 million users. Recently, Roku (Nasdaq: ROKU), a Billion Dollar Unicorn club member, went public. It has had a good run so far.

Roku’s Offerings

San Francisco-based Roku was founded in 2002 by Anthony Wood, the inventor of the digital video recorder (DVR) who is also a serial entrepreneur. Prior to setting up Roku, Anthony had founded ReplayTV, which was sold to DirecTV and iband, Inc., which was sold to Macromedia Dreamweaver.

Roku became a pioneer in streaming to the TV. As of June 2017, Roku had 15.1 million active accounts and streamed more than 6.7 billion hours. The number of accounts is significantly different from eMarketer’s estimates, because eMarketer reported the number of users per platform and not the number of subscribers. Overall, the hours viewed through Roku have grown 62% over the six-month period ended June.

Roku acts as a cable TV substitute for many consumers and allows them a wider choice and a personalized content selection. Roku offers both ad-supported and subscription-based channels. Ad-supported channels include CBS News, Crackle, The CW, and Vice. Subscription channels include HBO Now, Hulu, Netflix, DirecTV Now, Sling TV, and Sony PlayStation Vue. Additionally, users can also stream other on-demand videos through Amazon Video, Google Play, and Vudu.

Roku’s Financials

Roku earns revenues through the sale of its device and in the form of advertising and subscription services on its platform. Revenues have grown significantly over the past few years. Fiscal 2016 revenues grew 25% to $398.6 million.

For the first six months of 2017, Roku’s revenues grew 23% to $199.7 million. During this period, player revenue accounted for 59% of the revenues and fell 2% over the year. Platform revenues accounted for 41% of total revenue and grew 91% over the year. Losses have grown from $40.6 million in 2015 to $42.8 million in 2016. For the six-months ended June, losses came down from $33.2 million a year ago to $24.2 million.

Roku is focused on generating a majority of its revenue from its Platform business by growing the average revenue per user (ARPU). ARPU has grown from $9.28 for the six-month period ended June 2016 to $11.22 for the six-month period ended June 2017.

For the recently reported third quarter, Roku posted revenues of $124.8 million and a net loss of $46.2 million, or $8.79 a share. On an adjusted basis, net loss came in at $0.10 per share. The market was looking for revenues of $110.5 million and an adjusted net loss of $0.28 per share.

For the current quarter, Roku forecast revenues of $175-$190 million and a net loss of $8-$14 million. The Street was looking for revenues of $177.1 million and a net loss of $0.13 per share.

Till recently, Roku was venture funded with $208.6 million raised from investors including News Corp., Fidelity Investments, Globespan Capital Partners, and Menlo Ventures. Its last private funding round was held in November 2015 when it raised $45.5 million in a round led by News Corp at an undisclosed valuation. In September this year, Roku raised $219 million by listing at $14 apiece at a valuation of $1.3 billion. Its stock is currently trading at $52.89 with a market capitalization of $5.2 billion. It had peaked to $58.80 earlier this month.

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Roku has done well so far, and is expected to maintain its market lead in years to come. But the competition is likely to get tougher. eMarketer estimates that by 2021, Roku would have nearly 69 million monthly users to its account. By the same time, Chromecast would have grown to 64.6 million and Amazon Fire TV to 62.6 million. Meanwhile, Apple TV is expected to add under 4 million users to grow to nearly 25.2 million by 2021 from 21.3 million users this year.

Several analysts believe that the stock is over-priced. As the lock-in period expires, and investors try to cash in on their gains, the stock price would most likely fall. Roku’s biggest advantage used to be its high definition streaming box. But, that is no longer the case. All of its competitors’ devices currently come with a 4K option.