Roku's Business Is Not What You Think

Does The Company Have Recurring And/Or Rising Revenues?

Somewhat. Revenues are rapidly growing at about 30% year-over-year rates, as customers increasingly migrate to video-on-demand for their entertainment needs. Subscribers are growing at an even faster rate, +45% in 2017. This is the early stages of a mega-trend, and the addressable video ad market is enormous (over $150 billion in the U.S. alone). As for recurring revenue, obviously player revenue is not recurring. Platform revenue, on the other hand, is basically an advertising platform model that should be reliably recurring for Roku. As this is where the bulk of operating profits and cash flows originate from, we feel this gives the company a reasonably attractive revenue model.

Does The Company Have Durable Competitive Advantages?

No. Both Roku's devices and platform face substantial direct competition from tech heavyweights including Apple (AppleTV and tvOS), Google (ChromeCast), Amazon (FireTV), Microsoft (Xbox), Sony (PlayStation), major cable operators (Xfinity and Cablevision), and even TV manufacturers (Samsung, VIZIO, LG). All of these offer the same basic functionalities, and there is little preventing consumers from migrating to a competing streaming platform. Additionally, Roku relies on accessing ad inventory from its channel providers, and this inventory could decline or be withdrawn.

Business Model Rating: 

We feel that Roku's business model deserves a "weak" Yellow (somewhat attractive) rating. The attractive parts are the growth potential and reasonably recurring advertising revenue model, particularly given that it plays into the massive secular trend of on-demand video. The unattractive parts are intense and strong competition, no real durable moat characteristics, and reliance on partners to build ad inventory. It's a fragile business model, but one that could prove lucrative if the firm can navigate the minefield of risks.

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Disclosure: See below for our 

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