Turd Spotting. Roku. The New Cable.

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ROKU sells at 28.7x book value.  The S&P’s selling at 10.4x.  S&P companies make money.

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Forget earnings.  Roku has none.  “Price to sales” you ask?  12.7 vs. S&P’s 2.15.  That’s 5x the benchmark.  Yes.  That’s cheap, next to say, Zscaler’s 35x sales.  But ZS’s growing sales at a 60% rate, vs. ROku’s 47%.

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Roku’s

a $10.4 billion micro-cap out of Los Gatos California.  It’s skied 205%YTD.  Wow.  Could there be any question concerning buying ROKU here?  It’s chasing, anyway you slice it.  That is unless you understand that it’s a tread-driven secular momentum play.  It is in a technical slump.  Shares were down more than 3% as we began writing, just following the opening bell on Tuesday morning.  It’s down 8.06% over the last 20 days.

 

Roku’s losing money everyday.  That means it lives on debt.  As of the company’s Q1 report on May 8th, ROKU’s losing -$0.11 a share non-GAAP.  Consensus estimates predicted -$0.24.  Thus the quarter goes down as a 63.9% beat.  This is a company growing revenues by a 3Y annualized 32.4%.

 

CFRA research hates ROKU on “Quality, Valuation, and Financial Health.”  CFRA rates it a “Sell.”    What do they like?  The only things they could, “Street Sentiment,” and “Price momentum.”  “Hold,” is the recommendation floated by Reuters.

 

video game
Roku markets itself as the mandatory portal to the streaming life. It does that.  It’s the cord cutter’s escape from cable tyranny.  Aggregate your apps on their platform, manage your service subscriptions, and receive “recommendations,” all in one log-in, with one bill. What could possibly go wrong? Guess.  Right.  Ads, for one.  Roku’s a whole new ad turd pipe.

What

about product experience?  Ultimately, customers determine a company’s fate.  Roku games customers from their opening statement. “Plug it in and start streaming.” Not really–no.  Only after you buy it does Roku say it. They demand a credit card, just to activate.  Why? Paraphrasing “It makes it easy to add channels and make purchases.”

 

Roku’s cynical leveraging of a registered payment method is all about reducing “friction” at the POS, “point of sale.”  Good companies don’t leverage customers.  They don’t need to.  They prove their value first.  Think Amazon’s free trials.

 

The fact that Roku demands a c card simply to use the device you already purchased, should tell you something about integrity.  You invite them into your home and life, pay them, and they respond by refusing to allow you to use the product, until you lean even further in.  Kidnappers behave that way. 

 

On Monday RBC Capital downgraded Roku to “Sector perform.”  Price target of $90.  Current price $93.45, 7-5-19.

 

Activation means creating an account.  The site began looping. “Create account, Select a PIN, Account,” back to “PIN.” No escape.  Try not insisting on a PIN to authorize any purchases? As soon as “No PIN required,” was selected the process moved forward to step 3.

 

ROKU, Amazon
The Amazon product page for the Roku Express. No where in the description does it reveal that a c card will be required to activate and use the device. Regardless who writes this copy, Roku as a company should care enough to be upfront. Even when supposedly “explaining” the “need” for a credit card they dissemble. Paraphrasing from the Quick Start Guide “Why is a credit card necessary? To order channels and movies…” Roku demands your c card after purchase for one reason alone.; to reduce point-of-sale(POS) friction. That’s the marketing term.

Online

forums report the same experience.  Alonso12 tells us on the forums.roku.com page “…I have been trying since yesterday to create the account but when I click continue after putting in a PIN it sends me to the first step and says “Oops! Something went wrong, please try again.”

 

Roku In.(NASDAQ: ROKU), 7-3-19.

Chart, ROKU, 7-3-19
Rocket fuel is both exciting and explosive. Roku has thus far displayed half of that spectacular duo. What goes up hard, often comes back down hard. That half may be in the mail. Nothing rises forever.  205% is close to forever. The company’s shares enjoyed very stable appreciation following both their May and August 2018 quarters.  The price-action transformed this year into earnings announcement bolts(green circles.)  Run and rest is the pattern since the market-wide December bottom.  Roku is a trend-driven secular momentum play, thus yet another leg up could still be coming.(SJChart.)

Roku’s

devices are far too cheap to build or sustain real revenue . The real game here lies in post device purchases such as channel subscriptions, but even more so in platform ad placements.  Thus the ROKU “Channel Store.” 

 

Roku is the HP printer/ink blight all over. The money’s in the ink.  For Roku it’s the ads they sell to third parties and then pimp you with.  The data stream’s also very nice.  Roku is an ad and sales platform.  Aaggregating streaming sources simply gathers the audience.

 

 

Roku, screen shot
The above is what appears when searching “Roku Q1, 2019 earnings press release. Check the footer.

Investor

Relations sections don’t have cookie “Agreement” button footers.  Such are SOP when dealing with low-bar predatory sites.  Yet no “Investor Relations” page we’re aware of operates on the level of a porn site.  Roku remains a stand out in this practice.  Below is precisely what the footer states: “Our website uses cookies and similar technologies, including for personalization, advertising and analytics purposes, as described in our Cookie Policy. If you continue on this website without changing your settings using our Cookie Consent Tool, then you agree to our use of these cookies and technologies.”

 

On the Roku “Cookie Policy” page you find the “Cookie Consent Tool”  Two categories are displayed; “Advertising” and “Analytics and Customization.”  Under the Advertising rubric who do we see as data recipients?  Facebook Business, Google Adwords, and Tapad.  And why?  “Ad serving, Ad targeting, Analytics/Measurement, Content Customization, Optimization.”   Who’s participating under the “Analytics” header?  Google, Adobe, New Relic, Liveramp, Crezy Egg, and more.”  The direct link to ROKU’s Q1 Earnings Press Release is provided at article end.  Bare in mind that this is the “Investor Relations” section of the company’s website.

 

What does the company summary statement on Schwab say concerning Roku; “The Company connects users to streaming content, enables content publishers to build and monetize audiences and provides advertisers with capabilities to engage consumers. Its Roku platform allows users to personalize their content selection with cable television replacement offerings…”  Everything we stated previously about Roku being “the new calbe,” we wrote before we saw this.

 

Roku considers itself an ecosystem. It’s also similar to the in-game products created by video game makers; real ads, virtual and physical products. Take a step back and Roku looks exactly like a cable operator. The ads are simply on the platform, rather than solely pressed into the content. It’s also the Tivo data-mining format. The device is just the cover charge. 

 

ROKU, on the call

ON tHe CaLL

For us, Roku’s conference call is like listening in on Satan’s workshop.  You hear about “developing audiences” as though people are a cash crop.  They are.  Roku approaches “active accounts” or customers with a “meat processing” mentality.  Not once did they display any gratitude, as many companies actually do.  They never bothered to thank any, or display any understanding about how treating customers well is what creates their future.

 

In summary fashion, CEO Anthony Wood comments to the effect that “What’s motivated me from the beginning is that all ad dollars are migrating to streaming.”  He’s simply following the money.  As people attempt to escape cable’s monopolistic abuses, Roku does everything possible to create next gen cable.  Roku simply seeks to aggregate and advertise.

 

“Machine learning driven recommendations” are part of the consumer-facing side.  Never mind that Netflix has by far the most sophisticated algorithms in the business, and at least a decade lead, and an ad-free service.

 

More super-sized players such as Disney  and Apple are finally moving closer to launching their OTT platforms.  Such massive firms pack a serious and experienced negotiating punch.  When questioned about dealing with them, Roku insists they’re “partners,” not adversaries capable of fugly hardball tactics like Roku uses against it’s customers. 

 

The biggest players are at their door and the company’s fat margins are on the line.  CEO Anthony Wood.   “We are an essential partner for launching any OTT offering…Our biggest competitor is liner TV.”  Paraphrasing Wood “Our first-party relationship with account holders allows more leverage for delivering audience to advertising.”  And there you have it.

 

Roku’s mission is serving you up to advertisers, rather than providing useful service to you.  And they tell you so.  “Our number one focus is bringing in new ad dollars.” 

 

Mere moments earlier they suggest that “Our singular focus is a superior platform.  We have over 30 partners now.  We offer one bill, one log-in, and one place to gather channels, on our platform…we’re going international.”  It’s impossible to tell if this is confusion, or double talk.  Either way, Roku is the nascent new cable.  This is a la carte cable complete with soul-sucking ads, provided by the majority of channels, and the aggregator.  Only this time OEMs are also helping.

 

Roku OEMs
Screenshot of the Roku site page displaying televisions with a built-in Roku platform. The company is pursuing a two-pronged strategy. They push with OEMs to build in their platform, along with flogging their device as a stand-alone aftermarket add-on.

Roku’s

stabbing with a fork.  The company’s following Netflix, collaborating with original equipment manufacturers, or OEMs, to build its’ platform directly into your TV.  Roku isn’t a petty purchase price play.  It’s the long game.  Of course, Roku also comes as a stand-alone stick-on purchase.  And how’s it working?  “Platform revenues up 71%.  The 1# smart TV streaming platform system, taking share from ‘Home-grown’ OEM” devised streaming solutions.

 

Like many others, Roku’s prune metric is “Active Accounts,” and viewer “engagement.”  Average viewing time is over three hours a day.  Q1 brought in two million new active accounts.  In total they now have 29.1 million active accounts.

 

On the call analysts got personal.  “What percentage of platform revenue came from advertising?”  The company dummied up.  “We don’t break that out–” crackle, pause…”It was the biggest part.”  Big surprise.  And then “No, we have no plans to license any original content.”  Rather, “We can make it the greatest aggregation point for original content.”  Or course.  Sweeping together is always much easier then actually creating.  Everyone’s invited.  Never mind the cover charge.  It’s the back end price that’s gonna sting.

 

ROKU Q1, 2019 Earnings Conference Call:

https://ir.roku.com/events/event-details/q1-2019-roku-earnings-conference-call 

Roku Q1 Earnings Press Release link;

https://ir.roku.com/financial-information/quarterly-results

 

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