It was a rough week for Roku (ROKU 3.35%) stockholders. Shares of the streaming video gadgetry pioneer tumbled 26.8%. The first hit came on Wednesday after Comcast (CMCSA 1.25%) announced that it would be offering a lease of its own streaming device player at no additional cost for its internet-only Xfinity customers. The second dagger followed two days later after an analyst at Pivotal Research initiated coverage of the stock with a sell rating and a price target of $60 -- less than half of the stock's price at the time of the new Wall Street coverage.
A rough week doesn't mean that Roku stockholders have had a rough year. It remains one of this year's biggest winners after more than tripling, up 253% year to date. The stock has actually more than quadrupled since bottoming out on Christmas Eve last year. There are a lot of moving parts to the slide, so let's break it all down.
Image source: Roku.
A bad week in a good year
Roku has been one of this year's hottest stocks, and naturally it doesn't take much for an investment that was nearly a five-bagger at the start of the week to correct. The first shot was Comcast's move to offer Xfinity internet customers who don't have a plan bundled with its cable television service a complimentary lease of the Xfinity Flex streaming box. The Flex launched in the springtime at a $5-a-month price point.
The hit on Roku shares following the Comcast news seemed overdone. The vast majority of Xfinity customers -- 20.6 million of its total 28.5 million residential accounts -- don't qualify because they're also paying for cable TV through Comcast. Most of the rest likely already have their smart TVs or their streaming device of choice. The last thing they'll need is one more thing to return to Comcast when they cancel their subscriptions. It's also not as if streaming gadgetry is all that expensive; Roku offers a media device with access to thousands more apps and channels than Xfinity Flex with a voice remote for less than $40, and you own it outright. Why downgrade to Comcast's nascent platform that will inevitably steer folks to Comcast's own Peacock service when it launches next year?
The analyst hit was more serious. Jeffrey Wlodarczak feels that the shares are overvalued right now. He feels that competition among streaming devices will drive the cost of hardware to zero -- as we're effectively seeing now with Xfinity -- and that the crowded market for hub-fueled devices will eat into Roku's ad rates. A glut of operating systems may also eat into its subscriber growth and average revenue per user, the one-two punch that has fueled excitement over Roku's prospects as the industry leader.
Wlodarczak sees more distributors following Comcast's lead, but who are these players? The other internet providers are too small to make a difference or too busy protecting their more significant pay-TV platforms. There's a reason Xfinity isn't pushing these free box rentals to folks paying a lot more for its cable packages. The tech giants that already have devices on the market are also widely believed to be subsidizing their hardware to push their platforms, market conditions that haven't stopped Roku from growing its active accounts to 30.5 million, up 39% over the past year.
It's true that a growing roster of players is crowding the platform front, but the number of compelling apps and services being offered on those hubs is growing even faster. The migration to streaming services is real, and it's not just cord-cutting millennials that don't have a nostalgic connection to linear television. If there is a shakeout among tech outfits, it will be more on the services end than the handful of companies manning the operating systems.
As a market leader, Roku still has the pole position in this race, and it's a race in which there is enough track to have more than one winner. Yes, Roku stock will be volatile. We saw this happen last year -- with an even larger correction than this time around -- and Roku still more than made that back. Bet against Roku at your own risk.
