Although Roku (ROKU 2.70%) shares remain 84% below their all-time high from July 2021, the stock has been a huge winner this year, up some 90%. Investors seem to be warming up to the growth tech stock once again.
The immediate reaction might be to hop on the bandwagon to try and ride Roku's momentum to higher portfolio gains. But it's not that straightforward. There are some key bearish factors to consider. Before deciding to buy this streaming stock, investors need to know three important risks.
The growth of mobile competitors
Over the past several decades, television has been a big part of daily life not only in the U.S., but across the world, replacing the radio as the main form of entertainment. In more recent times, cable TV, and its expensive subscription bundles, were really the only way consumers could watch their favorite content. And in the last 10 years or so, streaming and connected TV have started to really take over.
Roku is the latest part of that timeline because its media sticks and branded TVs allow consumers to watch all of their favorite shows and movies from multiple content providers in one place. In fact, the company has top market share for smart-TV operating systems in the U.S., Canada, and Mexico.
But thanks to Apple's game-changing iPhone, which was released in 2007, smartphones have only gotten more advanced and easier to use. And they have only become more popular since then. Americans spend four-and-a-half hours per day glued to their mobile devices.
What if over time, more and more content is consumed from a smartphone, as opposed to a TV screen? Roku would give the power to Apple's iOS and Alphabet's Android, the two dominant mobile operating systems. Roku wouldn't necessarily become obsolete because some content would still be watched on TVs, but it would be going up against a powerful trend in consumer behavior, which could crush revenue potential.
NASDAQ: ROKU
Key Data Points
Concentration of content
There are over 200 different streaming services today, ranging from premium ad-free options to subsidized ad-supported services to completely free choices. That expands the ability to watch what you want when you want. However, consumers think that there are simply too many options.
Additionally, besides Netflix, which has started on the path of consistently generating positive free cash flow, content companies are in precarious financial positions. If a media and entertainment giant like Walt Disney sees its streaming operations posting hundreds of millions in operating losses each quarter, all the smaller content providers are certainly losing money as well.
With the main goal being financial survival, this could result in major industry consolidation. What if a decade from now, the industry only has three or four large players? It could end up that way. There likely won't be a need for middleman platform like Roku, especially since Netflix and Disney already sell ads.
We're already seeing the situation play out now where the content companies have greater negotiating power. Roku doesn't generate any revenue from YouTube, and I'd suspect it's the same for Netflix. Therefore, Roku needs them more than the other way around.
Big tech rivals
Any internet-enabled business will find itself having to face off against the giants in the tech sector. Roku is no different as streaming has become a hotbed for intense competition. Alphabet sells Chromecast, Amazon sells Fire TV, and Apple sells Apple TV. They all directly compete with Roku. Moreover, all three have streaming services. And they have far greater financial resources and tech talent than Roku.
These tech juggernauts utilize streaming to strengthen their entire empires. YouTube provides Alphabet with ridiculous amounts of data that can make its digital ad services better. Video entertainment attracts consumers to Prime, who may then shop on Amazon's popular website for free delivery. And in Apple's case, focusing on growing the Apple TV+ subscriber base can make the ecosystem even more powerful.
Roku's success thus far is certainly admirable, but it will have to stay on top of its game in an ever-more-competitive industry.
