At a high level, there are a lot of things to like about Roku (ROKU 0.94%). It benefits from the cord-cutting trend, which leads to tremendous growth potential. It has a market-leading position when it comes to smart TV operating systems. And the stock is currently trading at 87% below its peak price despite rising 51% this year.
But investors can't ignore a key downside risk with this streaming business. Let's take a look at what just might be the biggest bear case for Roku.
Crowded industry
An accurate description of Roku is that it's a streaming platform. The business connects consumers with all of their content options in an easy-to-use interface. Moreover, advertisers looking to target this streaming audience can do so using Roku's technology. So, this business has three key stakeholders: viewers, content publishers, and advertisers.
Besides selling its own smart TVs, Roku licenses its operating system to third-party TV makers. And it sells its own media dongles. And with the Roku Channel, the company also has its own ad-based free streaming service.
In the latest quarter (Q2 2023, ended June 30), Roku had almost 74 million active accounts that streamed more than 25 billion hours of content. The company has leading market share among smart TVs in the U.S., Canada, and Mexico. This is a clear sign of the success the business has achieved.
But as we look ahead, it certainly doesn't look like things will be any easier for Roku. Its top competitors in the space are some of the biggest and most successful enterprises of all time, including Alphabet, Amazon, and Apple. They compete directly with Roku and its media sticks, namely with Chromecast, Fire TV, and Apple TV, respectively.
Additionally, all three of these tech behemoths have their own streaming services that they're focused on. Alphabet owns and operates YouTube, which has an estimated 2.5 billion monthly active users. According to data from Nielsen, YouTube attracts more TV viewing time in the U.S. than Netflix. And with the help of NFL Sunday Ticket, YouTube TV is becoming an even more attractive internet-based solution to traditional cable-TV subscriptions.
Meanwhile, Apple has TV+, while Amazon has Prime Video. Both of these services are pushing forward into live sports programming. And they have already created award-winning shows and movies. To its credit, Roku does have top market share in the U.S., as I noted earlier. But internationally, it's a different story, with Alphabet having a stronger position.
Roku must be doing something right. But as these large tech behemoths start to focus more of their resources toward streaming, Roku will have to be at the top of its game. And it's worth mentioning that Alphabet, Amazon, and Apple all have expertise in digital advertising, which could become a notable advantage as marketing dollars shift from linear TV to connected TV.
What should investors do?
There are some factors working in Roku's favor. The fact that it aims to be an agnostic platform that should benefit as streaming continues to become more popular is at the top of the list. It has leading market share domestically, so it is a top choice among consumers looking to consolidate all of their streaming choices onto one interface.
Plus, Roku's business model is solely focused on the streaming industry. Alphabet, Amazon, and Apple have other hugely successful segments that likely attract a far greater portion of the management team's time and attention.
Investors always need to understand the competitive landscape, especially in a growth industry like streaming. Even though Roku has tough competition, it still might be a good idea to consider buying the beaten-down stock.
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