How Roku Stock Could Plummet To Under $30

Trefis analysis shows how Roku’s stock could potentially drop to under $30 from its current level of over $130, as a counter analysis to our upside case of How Roku’s Stock Could Cross $450. We outline a case showing how Roku’s platform revenues (which come from the sale of advertisements and premium content) could slow meaningfully. What’s the trigger? We first consider the case of Apple launching a lower-priced (or free) streaming hardware targeting its ~1 billion+ strong iOS user base. Then, we highlight how other possible triggers could lead to a similar set of events.

Below we discuss the specifics of Roku stock downside of $30, included with our interactive charts to test sensitivity to underlying assumptions. Deeper insights on Roku’s Revenues and our base case valuation for Roku of $140 are also available separately as context to this analysis.

Purpose of this analysis: To shine the spotlight on the unexpected but possible – the outlier situations. Share underlying data + assumptions. To help you be more prepared.

Roku stock has a track record of reacting very strongly to news

• Over Q4 2018, Roku’s stock declined more than 60% from $73 to $28, after the company posted slower-than-expected platform revenue growth.
• Similarly, the company saw its stock price decline roughly 30% from $170 to about $103 last September, after Amazon reported strong growth in its Fire TV user base, and Comcast announced that it would offer its streaming stick for free to broadband users.

Understanding Roku’s Market

Roku is useful to BOTH (A) cord-cutters & (B) for streaming cable and popular content from ESPN, Fox, Netflix, Google Play, Hulu, all directly to a TV

• Roku devices and operating system (in many cases pre-installed on a TV), allow users to stream video from many cable or streaming providers directly on their TV with an internet connection.
• Roku also provides free content to users connected to Roku devices.
• Roku targets pay-TV subscribers and users of popular streaming services such as Netflix and Amazon Prime Video.

#1. What could trigger a decline in Roku’s Stock?

Apple could double down on Roku’s core market with a lower-priced streaming stick

• Apple’s TV hardware currently starts at $150, 5x Roku’s base price.
• As Apple has been betting big on services, including digital video streaming, it could decide to offer a lower-priced Apple TV device at price points similar to Roku’s, or potentially even offer it for free.
• As Apple’s iPhone user base stands at over 900 million (over 30x Roku’s user base), the company could easily win over customers, offering them tighter integration with Apple devices and services.

#2 Past Example: Apple ate Fitbit’s lunch with the Apple Watch

• The trend of specialized consumer technology hardware companies being beaten by the platform giants is not new.
• Fitbit saw its wearables sales decline as Apple launched and scaled-up sales of the Apple Watch that offered tighter integration with the Apple ecosystem.
• Fitbit stock declined from $47 post its IPO in 2015 to under $5 last year. Google eventually acquired the company.

#3. How could Roku’s stock be impacted by Apple doubling down on streaming hardware?

#3.1 Roku’s sales growth could stall/decline

• If Apple launches a lower-priced streaming device over the next two years, Roku could begin to feel the heat.
• This scenario assumes that Roku’s total revenues will begin to decline from 2022 onward, with Roku’s average accounts, ARPUs and hardware sales posting declines.

#3.2 The slower revenue growth could hurt Roku’s valuation multiple, causing it to fall from 10x in 2020 to 2x by 2022

• Roku’s revenue growth could decline from levels of 40% currently to negative levels under this scenario, hurting the company’s valuation.
• For instance, Fitbit’s P/S declined from 2.6x to 0.8x between 2015 and 2018 as the Apple Watch gained traction.
• Considering this, Roku’s P/S could fall from about 10x in 2020 to about 5x in 2021 and 2x in 2022.

Is Apple launching a lower-priced device the only possible trigger?
No – there are other risks

Roku could see slower growth due to multiple other factors:

• Disputes with key content providers or TV hardware partners: Customers buy Roku’s streaming players and Roku-powered TV s for the wide variety of content it supports. If Roku’s key partners decide to pull their channels /content (as Fox did for a brief period ahead of Superbowl 2020), it could impact Roku’s user base.
• Amazon and Google could get more serious about their video platforms: Google and Amazon offer their own streaming hardware (Chromecast and Fire TV) as well as software platforms, and they could also consider Roku’s business a low-hanging fruit.

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