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What the Heck is Roku and Should I Invest In It?

Roku (NSDQ: ROKU), the manufacturer of streaming video devices, went public last week. The shares, which were priced at $14, promptly leaped to $15.75 on the open and closed at $23.50, up 68% on the day, one of the best showings of any IPO this year.

Shares have since pulled back to $21.70, leaving investors wondering if Roku’s glitter will fade as quickly as that of Snap (NSDQ: SNAP) or Blue Apron (NSDQ: APRN). Both of those IPOs were hailed as super popular but lost their luster within the first week of trading as public companies.

But unlike Snap or Blue Apron, Roku isn’t a household name.

If any of you are like me, you may have a few questions about Roku:

  1. Ro-WHO? Who the heck is Roku?

Roku designs and sells streaming players that allow you to stream content via your television. The process of streaming web-based content over a TV is deemed “Over the Top” or OTT content and is an area many investors are eager to be involved with.

Roku’s devices cost between $29.99 and $99.99. There is no subscription fee or rental fee to use the device. The devices are sold through typical retail channels, Best Buy, Target, Walmart and Amazon amongst others.

Once the device is connected to your television, you can stream content from just about any provider, including Netflix, Hulu, and Amazon video as well as traditional cable and network channels.

2. Why Would I Use Roku?

Entertainment, which used to be consolidated on the cable networks, has never been more fragmented. Consumers now subscribe to multiple content providers, like Netflix or HBO, to watch their favorite shows.

Roku’s platform is channel agnostic. The company’s easy to use welcome screen allows you to scroll through viewing options from just about any content provider. Instead of flipping between devices and various content menus, Roku consolidates it all in one place.

3. Why Are Investors So Excited About Roku?

Much has been written about current times being the “Golden Age of Television.” I must concur. There is a cornucopia of fabulous shows to watch, and a service like Roku’s offers a simple solution for finding content.

Original programming from the likes of Netflix and HBO is winning industry awards and the accolades of consumers who wait with baited breath for the next season of their favorite show.

One mention of Game of Thrones or Ray Donovan gets the chatter going at any cocktail party. I don’t know about you, but I have a list a mile long of new shows that I want to watch, and each one is delivered via a different programming company.

Roku’s benefit is that it consolidates all that disparate content and makes it easier for consumers to find and choose what to watch. If you want to watch a show from a provider with whom you don’t have a subscription, Roku makes it easy. The company links your credit card to your account and charges you instantly if you choose a paid channel.

4. Is It a Good Investment?

Ah, the $64,000 question.

Roku was a pioneer in video streaming. The company was founded in 2002, the Stone Age in internet history. Its first streaming hardware worked for Netflix’s movies which were then transitioning from being mailed to your house to being streamed over the internet.

Fast forward and the hours of content being streamed over the internet is increasing 60% each year. Roku’s IPO prospectus is replete with charts showing rocket ship graphs illustrating growth in streaming hours, active users and most importantly, average revenue per user.

Investors are charmed by this geometric growth and what is believed to be a “pure play” investment on the growth of streaming video.

Unfortunately, Roku may not be the best way to play this booming industry.

The company is losing money, which makes valuation quite tricky.

The good news is that it just started generating some cash, so it is unlikely the company will need to sell more stock to build its business. Also, revenue from highly profitable advertising dollars is growing much faster than less profitable hardware sales.

I worry that despite being early to this market and having an acceptable solution to the tangled maze of viewing options, it has little barrier to entry and almost no intellectual property.

Netflix figured out about ten years ago that creating original content would give it a competitive advantage. Before then Netflix was simply a distributor of other people’s content. Now it has an incredibly loyal and gigantic swarm of subscribers who cannot watch the next season of Stranger Things without it.

Roku isn’t even a distributor of content but rather a TV guide or listing service for those channels. The stock might do well in the short-term due to the shortage of stock plays in this sector, but I’ll be looking elsewhere for a stock I can rate higher.

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