A not-so-secret ingredient in Roku's (ROKU -10.29%) success over the years has been its agnosticism. It plays nice with most streaming applications, explaining why there are thousands of apps available to anyone on the Roku ecosystem. It's also partnered with third-party television manufacturers to make Roku the default operating system on their smart TVs, explaining why more than a third of all smart TVs sold in the U.S. fire up Roku as a factory-installed feature. Is Roku starting to get too hungry for its own good?
The company announced on Wednesday that it will be rolling out its own Roku-branded HD and 4K TVs in the spring. Unlike the licensing deals that it has struck with TCL, Philips, Hisense, and others over the years that simply involve providing its popular operating system, the new Roku Select and Roku Plus TVs will be the first to be both designed and made by the streaming video pioneer itself.
Roku shares moved higher at the open on Wednesday, so apparently the market doesn't think this is a bad idea. Yet as a long-term bull and shareholder in Roku, I'm not so sure that this is a good direction for the company to be taking right now.
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Farewell to agnosticism
The company is already paying the price for moving away from its early tactics of not taking sides when it comes to content. Roku has been investing in proprietary content that it can funnel into its Roku Channel offering. From acquiring the Quibi content catalog to paying up for the rights to Weird: The Al Yankovic Story, Roku is hoping to make its hub stickier for viewers.
It's working in theory. The Roku Channel is now one of the five most popular apps on the platform. Audience size and engagement have climbed. Active accounts on Roku increased 16% over the past year, to 65.4 million. The average household is spending more time cradling the Roku remote than it was a year ago. However, one has to wonder if the companies behind the third-party apps on the platform are starting to feel that Roku is facing the same conflict of interest as competing hubs. Roku's early appeal to consumers was that it wasn't one of the tech and e-commerce giants entering the dongle market to push their own premium streaming apps.
The end of agnosticism on the content front finds the once profitable Roku now sporting losses as it invests in content as well as subsidizing its diminishing hardware business. Can you imagine how the bottom line will look once it enters the cutthroat market of TV sales?
The company is taking an aggressive position. Roku-branded smart TVs will run from $199 to $999, and we've already seen that retail prices get discounted sharply during the promotional holiday shopping periods. If the business is willing to take small hits by selling Roku dongles below cost, one can only imagine how deep the red ink might flow as it dives into the TV market that even seasoned vets in this space haven't been able to navigate successfully over time.
Adding insult to injury, how do you think TCL, Philips, and the rest of its smart-TV makers will feel? Roku was inside 38% of the country's smart TVs two years ago, largely because the manufacturers saw Roku as a partner. What happens now that it has become a competitor?
Roku was already one of last year's hardest-hit investments among streaming video stocks. Shares of Roku plunged 82% in 2022, and the stock now trades at a historic low valuation in terms of its revenue multiple. It may be seeing the launch of its own smart TVs as a way to boost revenue and brand awareness, but investors already saw that success on that front didn't amount to much over the past year. It needs cost controls to get back on Wall Street's good side, and the hardware push should only make the deficits wider while also distancing Roku from its strategic partners.
