Earlier this month, I thought I made a persuasive case for investors to avoid Roku (NASDAQ:ROKU) stock before it went on a tear in the wake of better-than-expected earnings and optimism about a partnership with Apple (NASDAQ:AAPL). Since my crystal ball appears to have been faulty, I decided to take another look at ROKU stock and have decided that it may be worth considering for investors with very high tolerances for risk.
To be sure, Roku has got plenty going for it including a popular lineup of products that high tech experts rave about. However, the company isn’t rolling in cash.
During the three months that ended Dec. 31 net income at Roku was a minuscule $6.77 million, or 5 cents per share, compared with $6.94 million, or 6 cents, a year earlier. Revenue at the Los Gatos, Calif.-based company surged 47% to $275.7 million, buoyed by the strength of its Platform business.
The company forecast 2019 revenue of more than $1 billion thanks to the growth in its operating system for smart TVs that it has been developing for the past 10 years and the strength of its advertising business.
According to MacRumors, Roku is finalizing a deal with Apple that would enable Roku users of Apple’s AirPlay 2 to stream content directly from their iPhones, iPad, and Macs directly to their smart TVs. This would be a coup for Roku, which competes with AAPL and other tech giants, such as Amazon (NASDAQ:AMZN) and Alphabet’s Google (NASDAQ:GOOG) in the video streaming equipment market.
Whether it’s a prelude to closer ties between the two companies is hard to say.
Questions Linger as Costs Surge
All of the good news about Roku, however, comes at a steep price as the company’s costs are growing at a faster rate than its revenue. Roku’s operating expenses surged 67% to $106.8 million in the fourth quarter as it added more than 1,100 employees, a “record number of net new hires.” Operating expenses are expected to be $10 million higher in the current quarter than the fourth quarter as it continues its hiring spree.
CEO Anthony Wood also didn’t provide many details about Roku’s overseas expansion plans during its earnings conference call other than to say the company operates in 20 countries and that its investments will start paying off in 2020.
“… We are starting to invest in the team and projects. And again, we haven’t broken out the amount, but it’s one of the — International is probably one of the top four areas we’re investing in along with Roku TV, The Roku Channel is International. So we’ll have more information as the year plays out.”
Volatility Reigns Supreme
Not surprisingly, considering its rising spending, ROKU expects to lose money in the current quarter and for 2019. Given that their competitors are so much larger, I remain skeptical that Roku will be able to maintain its competitive edge over the long run. Moreover, since the video streaming market is fairly concentrated it would be difficult for a rival like AAPL or Amazon to buy Roku without running afoul of antitrust regulators.
Roku now trades more than $10 over its average 52-week price target of $63.84. Could it soar higher? Given the hype around the video streaming market, absolutely. However, Roku shares can easily crater with the slightest hint of bad news. It’s clearly a stock for investors with a high tolerance for risk, far more than I am willing to tolerate.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
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