Streaming hardware and platform company Roku (ROKU 4.10%) has spent years carving out its share of the industry but isn't stopping there. The company recently announced a lineup of smart-home devices to further the idea that televisions are becoming the technology hub of homes.
But should investors applaud or condemn Roku's smart-home push at a time when the stock is down tremendously and the company isn't yet profitable from its core streaming business? Let's examine Roku's likely plan for its new products and why investors shouldn't rush to judgment.
Is Roku entering treacherous waters?
Roku announced a lineup of smart-home products in mid-October, including indoor cameras, video doorbells and chimes, light bulbs/strips, and indoor/outdoor plugs. The company will sell the devices exclusively through Walmart online and in stores. The devices will integrate with the existing Roku software platform. For example, you can see who's at your front door by pulling up the video feed on your Roku TV.
The smart-home market in the United States could grow to nearly $50 billion in revenue by 2026, and Roku feels that it's adjacent enough to streaming that it wants a piece of the pie. Competition isn't everywhere, but there are already prominent brands in the space like Nest and Ring, owned by Alphabet and Amazon, respectively, which Roku already competes with in streaming.
Roku's wagering that there's room for penetration in the lower-priced tier; all of its smart-home products will cost less than $100. Just like Roku isn't trying to make money on its streaming sticks, the company likely isn't making anything on these devices. Consumers will control their devices with the Roku Smart Home app and subscribe to a plan to unlock certain features.
But does the move make cents?
Roku's use of hardware as a customer acquisition tool -- meaning it loses money on its streaming sticks to get people to use its platform -- is likely also the plan for the smart devices. Roku is partnering with Wyze Labs, a company that makes smart-home products, on its product lineup, which takes manufacturing off Roku's plate, but probably means it is losing money to keep the selling price as low as possible.
An argument against Roku as an investment is that hardware sales drag down the company's overall profit margin. Roku had a 56% gross margin on its platform segment in the second quarter of this year but a negative 24% gross margin on the hardware. I would suspect that Roku's smart-home business will pressure profits for the foreseeable future as it works to grow a user base.
ROKU Free Cash Flow data by YCharts
Investors must follow Roku's financials closely moving forward. The company is already juggling its growing streaming business, a dive into content creation, and now this smart-home product lineup. On the one hand, it's good that Roku is planting many seeds for long-term growth. However, you can see above that there's not much free cash flow from the business, which reduces the margin for error that management has with its spending. Roku has $2 billion in cash and almost no debt, so this is more of a long-term concern than anything.
Is the stock a buy?
It seems too early to base a buy or sell decision on Roku's smart-home foray; there's not enough evidence yet to move the needle. The stock remains near its lowest share price since 2019, as well as its lowest price-to-sales ratio (P/S) as a public company:
ROKU PS Ratio data by YCharts
There's an argument that Roku is a buy today based on its streaming segment alone. Worries about the economy are hurting advertising businesses across Wall Street, including Roku. However, the company keeps steadily increasing its user base, which now stands at 63.1 million versus 29.1 million in early 2019 (when it last traded this low). It's hard to see that as anything other than an opportunity if you're a long-term believer in the business Roku's building.
