Streaming TV specialist Roku (NASDAQ:ROKU) has seen a boost in engagement from COVID-19, which has forced people to stay home, where they inevitably end up watching more TV than usual. However, monetizing that usage is another task altogether, and investors are concerned that ad revenue growth is expected to decelerate because the pandemic has crushed broader ad spending.
Here's another concern to add to the mix.
TCL is Roku's "most important partner"
Stephens analyst Kyle Evans downgraded Roku shares yesterday from overweight to equal weight (equivalent to a hold), while slashing his price target from $155 to $105. The analyst is worried that Roku's partnership with TCL may be lopsided, with Roku realizing the lion's share of benefits from the collaboration.
Roku and TCL first partnered back in 2014 to integrate Roku OS into its affordable smart TVs, and licensed sources have been an increasingly important source of new active accounts for Roku, often representing over half of new accounts in a given quarter. Licensing the platform out to third-party manufacturers frees Roku from having to focus on low-margin hardware while allowing the streaming tech company to shift its attention to growing high-margin platform revenue.
Evans doesn't doubt that the partnership has been "mutually beneficial" for both companies in terms of market share, but TCL is doing the "heavy lifting" while missing out on the post-purchase monetization that Roku enjoys. TCL's growing popularity has been driven by low prices, which in turn results in low margins.
There is a risk that TCL may become disgruntled with the lopsided relationship, in which case the Chinese company may look to renegotiate terms or partner with competing streaming TV platforms instead, the analyst implies. That could be a blow to Roku, as Evans considers TCL to be the company's "most important partner." Furthermore, TCL has been investing heavily to expand manufacturing while reducing prices, which may not be sustainable.
At the same time, Evans argues that Roku has been dragging its feet regarding international expansion, which management has highlighted as a key growth initiative in 2020. "We are also somewhat concerned by the slow pace of ROKU's international expansion and what we worry are creeping expectations for OneView (dataxu)," the analyst wrote in a research note to investors.
Evans is referring to last year's $150 million acquisition of ad tech platform DataXu, which was the foundation of the new OneView ad platform unveiled earlier this month. It integrates self-serve capabilities, inventory management, and more across various ad formats. Investors may expect too much of OneView, particularly as DataXu had been struggling for years before getting purchased.