Roku (ROKU -1.00%), one of the hottest tech IPOs last year, has been a painfully volatile stock to own. The stock made its public debut at $14 last September, soared to $23.50 on the first trading day, and skyrocketed to the mid-$50s by the end of 2017.
Yet Roku dropped back to the low $30s this year, after investors grew concerned about its waning hardware sales, the sustainability of its platform business, and its lofty valuations. Its fourth quarter numbers easily beat expectations on the top and bottom lines in February, but the stock kept sliding.
Image source: Roku.
That volatility continued throughout April, as several new developments strengthened both the bullish and bearish cases for Roku. Let's examine five new reasons to buy Roku, and one new reason to dump this divisive stock.
Five new bullish catalysts...
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After the market close on April 16, Roku announced that it would launch Disney's (DIS -1.95%) new streaming service ESPN+ on its devices. ESPN+ costs an extra $4.99 per month and offers fewer ads than regular ESPN viewers receive on the ESPN App, ESPN.com, and other connected-TV platforms.
The news caused Roku's stock to rally 9% the following day. The ESPN+ partnership is a win-win deal for both companies, since Roku gains more content to attract viewers, while Disney might retain ESPN subscribers via digital channels.
However, ESPN+ is also available for iOS devices, Apple TV, Amazon's (AMZN -2.92%) Fire TV devices, Android devices, Android TVs, and Chromecast. Therefore, gaining ESPN+ merely helps Roku keep up with the competition instead of gaining a competitive edge. -
Steve Cohen's hedge fund, Point72 Asset Management, recently disclosed a 5.1% passive stake in Roku via a 13G filing. That vote of confidence was encouraging, since institutional ownership in Roku, prior to Point72's filing, remained low at 24%.
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Roku's post-IPO lockup expired on March 27. Therefore, any major insiders who wanted to sell the stock probably already did so. Meanwhile, insiders seem bullish on the company's future. Over the past three months, insiders sold 12.5 million shares but bought 54.4 million shares on the open market.
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Roku will also launch the Roku Channel, which generates its Platform revenues, on select Samsung Smart TVs. That partnership could help Roku reach a lot more viewers, since Samsung is the largest maker of premium TVs in the world.
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18% of Roku's shares were still being shorted as of April 10. Some short sellers may cover their positions before Roku's first quarter report on May 9, potentially sparking a short squeeze.
And one new headwind...
But on April 19, Roku's stock plunged 12% after Amazon partnered with Best Buy (BBY -0.63%) to sell new Amazon-powered "Fire TVs" in its stores and on its website this summer.
These TVs -- which are produced by Toshiba and Best Buy's in-house brand Insignia -- will be fully integrated with Amazon's services and Alexa. Best Buy will also become a merchant for the Fire TVs on Amazon's website.
Image source: Getty Images.
That partnership deals a major blow to Roku, since its platform powers Best Buy's Insignia Smart TVs. Best Buy will still sell Roku-powered Insignia TVs alongside Fire TVs, but that direct competition could throttle the growth of Roku's closely watched Platform revenues.
Do the pros outweigh the cons?
Wall Street expects Roku's revenue to rise 32% this year, but for its GAAP earnings to remain in the red. The stock isn't cheap at six times trailing sales, and the company still faces escalating competition from Apple, Alphabet's Google, and Amazon.
Roku's core strategy, to pivot away from low-margin streaming devices toward higher-margin platform services, is a sound one. However, Amazon's partnership with Best Buy indicates that the growth of Roku's Platform revenues -- which surged 129% annually last quarter and accounted for 45% of its top line -- isn't guaranteed.
Therefore, I'm still not convinced that Roku's strengths outweigh its weaknesses just yet. I'll keep an eye on the stock, but I won't buy it unless it becomes simply too cheap to pass up or the company proves that it can keep growing its platform revenues in spite of the competition.
