Betting on a powerful secular trend, like streaming entertainment, can be a solid investment strategy. In particular, Roku (ROKU 0.95%) is a business that appears to be in a good position to benefit from consumers cutting the cord, as well as advertising dollars moving over to connected TV.
Investors who want to bet on the growth of the streaming industry might be leaning toward adding Roku shares to their portfolios. But it's of the utmost importance to also be aware of any downside possibilities.
With that being said, let's look at what could be Roku's single biggest risk. Here's what investors should know.
The bullish case for Roku
I think Roku's investment case is pretty straightforward. More and more people are choosing streaming over traditional cable TV. According to eMarketer, fewer households in the U.S. have a cable subscription than those that have cut the cord, a trend that has been several years in the making. From a customer's perspective, it's not surprising why they would choose streaming. It's a better user experience, providing greater convenience, many more viewing choices, and likely at a cheaper cost.
Roku is the leading smart-TV operating system not only in the U.S., with 43% unit share, but also in Canada and Mexico. The same way Microsoft controls PC operating systems and Apple's iOS or Alphabet's Android control mobile operating systems, Roku wants to apply this same strategy to being the dominant TV operating system. In other words, the business wants to control a house's living room, which can be lucrative given how much time people spend watching TV.
The company currently has 71.6 million active accounts, up 17% year over year. And these accounts watched an incredible 3.9 hours of content on the platform per day during the first three months of 2023, a record for Roku. As households domestically and across the world switch away from cable TV and toward streaming, Roku is in a good place to keep growing.
The threat of consolidation
Despite a compelling bullish argument, I believe that the most important risk Roku shareholders should be mindful of is the threat of consolidation. At this moment, there are dozens of streaming services out there, ranging from premium ad-free options to free ad-supported TV.
And the sheer number of choices immediately showcases why there is a need for an aggregator like Roku. Combining all of these services in one easy-to-use interface is almost a no-brainer for a consumer. The company's search capabilities make it seamless to find exactly what you're trying to watch.
But anyone who follows the industry knows that even today, there are already a few major players. Netflix pioneered streaming, and it has 233 million subscribers. Walt Disney, while late to the game, currently has 231 million subscribers across Disney+, Hulu, and ESPN+. Warner Bros. Discovery, home to the refreshed Max service, counts 97.6 million subscribers.
Then there's big tech. Amazon Prime Video, Apple TV+, and Alphabet's YouTube are also fighting hard to attract eyeballs. And they certainly have the financial power to gobble up smaller streaming companies.
What happens in the future if the number of services shrinks to two or three massive providers that control virtually all the content that's produced? In this scenario, would there even be a need for a distributor like Roku?
A so-called "super Netflix" or "super Disney" wouldn't need Roku to reach a wide audience, simply going direct-to-consumer. They would be able to do this because consumers would demand their content more than they would need an aggregator like Roku. Moreover, they have already launched their own ad-based membership tiers.
However, Roku may have some strategies to navigate this possible future. For instance, they could produce a significant amount of original content or develop exclusive partnerships to maintain relevance in a consolidated market. Furthermore, it's worth noting that such a consolidation could draw regulatory scrutiny or anti-trust lawsuits, introducing another layer of complexity to this potential scenario.
To be clear, this risk might be further along the timeline and less of a near-term concern. But it's best for investors to follow any changes in the industry in the years ahead.
