By now you've heard the news: Comcast (NASDAQ:CMCSA) is offering its internet-only subscribers a free over-the-top (OTT) Xfinity Flex streaming device from which to stream content, potentially making Roku's (NASDAQ:ROKU) ubiquitous streamers superfluous. Hearing this, investors subtracted 14% from Roku's market capitalization on Wednesday.
Which kind of makes sense, but why is Roku stock going down another 10.5% as of 10:10 a.m. EDT today?
The answer: Somebody on Wall Street just heard the news from two days ago. This morning, analysts at Pivotal Research announced they're initiating coverage of Roku stock with a sell rating, arguing that Comcast's move is evidence of "dramatically more competition emerging that will likely drive the cost of OTT devices to zero."
If Pivotal is correct, then the competition promises to deprive Roku of the source of 43% of its revenue -- selling streaming video players, and stifling the company's rapid growth rate.
Despite coming out late with its reaction to Comcast's move, make no mistake: There is a danger here. Hardware sales per se aren't a huge profit driver for Roku (streaming players only generate about 11% gross profit margins for the company, versus the 71% gross margins it earns on its platform revenue, according to data from S&P Global Market Intelligence). But putting Roku players in consumers' homes is a key first step to generating those fatter platform revenues in the first place.
Granted, Comcast's success is far from certain. But if it can displace Roku's hardware in the living room, can Roku software's displacement be far behind?