In this segment of the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Aaron Bush of Supernova and Rule Breakers examine the hottest IPO of the year so far: Roku (NASDAQ:ROKU). When new shares take a bounce this big, the obvious question is, how much is hype, and how much is justified? The Fools weigh in.
A full transcript follows the video.
This video was recorded on Sept. 29, 2017.
Chris Hill: The hottest IPO in a while hit Wall Street this week. Roku, the maker of products for streaming TV services, went public at $14 a share, and in just two days, it doubled. It doubled, Aaron! I mean, is this hype of the highest order? Or is this warranted, in your mind?
Aaron Bush: I do not think it's warranted. I do think it's hyped. I do think the IPO was underpriced. So some of the pop that we're seeing probably isn't as justified; it just makes it look better than it is.
When I look at Roku the business, I do not see a fantastic business model. And I think it's in a pretty tough evolutionary position. Gross margins are only about 40%. Free cash flow is barely positive. It really doesn't make money off the devices themselves. Obviously, that's not good enough to be a worthwhile business. So the company is pursuing revenue deal shares with content providers, pay-per-view revenue, even advertising. So when I see a company like Roku start pursuing advertising, it just shows me, maybe things aren't entirely figured out as much as they're letting it seem.
And all of that said, I actually think the long-term result of this type of box technology that you plug into the TV, the future is already set, and the future is, those boxes are going to go away. It's all going to be inside the TV itself. We saw in 2016, Roku TVs represented about 13% of smart-TV sales, meaning that Roku was the operating system powering those TVs. And that's definitely the right way to go. It leads to different revenue options. I think it's fascinating, but it's still a tough position. Thirteen percent isn't quite so dominant.
Matt Argersinger: I just don't get it. I can't distinguish Roku from Fire TV from Amazon, Apple TV, my PlayStation 4, which I use a lot to watch TV and access entertainment apps. And I totally agree with Aaron, at some point, this is all built in. Even the video-game companies say the era of the console itself is probably going to be ending soon. The next generation of consoles is going to be built right into the smart TV. So Roku is just a hardware, essentially a device, a portal to all your favorite entertainment apps. I don't understand where the value there is going to be created.
Jason Moser: I'm not saying Roku can't be successful. But I was thinking about this -- it feels like an apt comparison -- when GoPro (NASDAQ:GPRO) went public and we saw in their S-1 that they knew they were a hardware maker, but really the light at the end of the tunnel was becoming more of a media company, monetizing content. I feel like that's kind of what Roku is trying to do here. And I'm not saying they can't do it, but clearly GoPro has had a lot of trouble making that leap. And given where Roku is at this time and place in the market with all these competitors out there, it's a very difficult transition to make. And as an investor, I think, you have to hold the burden of proof on them until they prove otherwise.
Bush: In the long run, the ultimate differentiator is exclusive content, whether it's exclusive video apps or games. And I just have a hard time seeing Roku do that over someone like Apple.
Hill: So we should not expect the CEO of Roku to come out and say, "We're never going to lose money again?"
Bush: Well, they're not doing so hot right now.
Argersinger: They may never make money.
Aaron Bush owns shares of Amazon, Apple, and GoPro. Chris Hill owns shares of Amazon. Jason Moser owns shares of Apple. Matthew Argersinger owns shares of Amazon, Apple, and GoPro and has the following options: short December 2017 $900 puts on Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, and GoPro. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple.The Motley Fool has a disclosure policy.