Not only should Disney+ perform well this quarter, according to the data below, but keep in mind, Roku is downstream from Disney+ and will benefit from the company’s success.
When I was researching Facebook last week, something really stood out to me. Disney+ was ranking very high on both free apps and top-grossing apps on Android and iOS. On a few days, Disney+ beat out #1 sensation Tiktok, and on most days, the app beat out Instagram, Snapchat, YouTube, Facebook, Facebook Messenger, and Whatsapp.
This is unusual because the majority of the OTT media downloads don’t come from smartphone app stores. They come from an OTT player, like Roku, Amazon Fire, Google Chromecast or Apple TV.
This deck was collected at the four-week mark (or December 12th). Apptopia told me in an email that Disney saw a total of 30 million downloads on the app store in November and December (so, basically another 8 million after the deck was published).
You’ll see in the deck that retention is lower than usual, but with the OTT volume, Disney should be able to have a decent report tomorrow. Retention is probably low due to viewers watching The Mandalorian and not returning to the app. Disney will also have to prove it can convert free subscribers to paying subscribers when promotions expire (i.e. the Verizon promotion is a year of free Disney+).
From my perspective, this is positive data for Disney and I’m excited to see the earnings report tomorrow. I fully expect Disney to permanently overtake Amazon Prime Now for the number two spot over the next year or so. Global will be a significant strength for Disney.
Theme parks in Hong Kong may affect earnings. The coronavirus may also affect theme park earnings and theater earnings in fiscal Q2 2020 ending in March. I think analysts will look at these as temporary setbacks and will be more focused on Disney+.
Disney also probably spent a decent chunk of change on advertising this quarter. This may affect their earnings, but I think any positive news on Disney+ will overshadow this. Roku will benefit from the ad spend. Also, look at page 8 in the deck– it shows the effects Disney+ has had on Roku downloads.
Please note, the Disney+ information will be in MarketWatch tomorrow per an agreement with Apptopia. I will not be publishing the Roku download information on page 8 of the deck and will keep that exclusive for premium subs.
This article was originally published on Forbes on Jan 20, 2020, 07:49pm ESTForbes on Jan 20, 2020, 07:49pm EST
Two of the world’s largest brands entered subscription video on demand (SVOD) over the past quarter, which means the upcoming Netflix earnings report on January 21 will be under pressure. However, financial analysts are overestimating Disney and Apple, as these companies will not easily catch up to the top streaming subscription service over the long-term.
Netflix has a Firm Hold on OTT
There are more than 190 OTT providers to keep track of in the United States. This has the market in a frenzy, which is one reason we see whipsaw reactions to news of any kind in the OTT market. For instance, Netflix shed $24 billion in market value following the second-quarter earnings release in July. This could happen again, but in the long-run, it won’t matter.
According to Digital TV Research, the OTT market is set to grow from $68 billion in 2018 to $159 billion in 2024. Subscription services will grow by $51 billion between 2018 to 2024, reaching a total of $87 billion.
Netflix is the top subscription service in the OTT market by a wide margin, claiming 87% of OTT households in the United States. In Western Europe, Netflix has a penetration of 70-87% in English-speaking countries and 55-64% in non-English speaking countries.
Disney forecasts Disney+ to have between 60 million and 90 million subscribers by 2024. This is despite many free promotions. Netflix currently has 158 million paying subscribers and is adding roughly 28 million more per year. With this level of penetration, for Netflix, the opportunity that remains is global.
Netflix’s Stock Price Hinges on Global Logistics
Before third quarter earnings, I had pointed out that Netflix’s opportunity is global, and this is why the balance sheet looks frightening to value investors. Netflix’s stock price has most certainly reflected a market concerned with the company’s debt as the stock has posted 0.17% returns – or nearly 0% — over the past 12 months, while Disney and Comcast are up 30% and 31%, which is more in line with the broader market.
The company is in the red with free cash flow due to producing content for many geographic regions. However, as broadband coverage increases globally, and as 5G delivers faster speeds to developed countries, Netflix is well situated to grow its already-dominant user base and to reclaim these costs. Notably, Netflix’s operating margins stand at 18.9%. (More on broadband penetration below).
There is plenty of evidence that domestic OTT players will not be able to handle the logistics of going global. For instance, while Friends and The Office are leaving Netflix in the U.S., many of the shows will remain with Netflix internationally. According to Amy Reinhard, VP of Acquisitions at Netflix, only Disney can compete in international distribution at this time. Netflix also partners with companies like Warner Bros. for international film rights.
Asia’s population represents the majority of the world with gains of 2-3% being more impactful than double-digit gains in North America. According to eMarketer, Netflix’s penetration of Asia-Pacific will advance from 11.8% in 2018 to 14.3% in 2020.
Regions, such as China, have high barriers to entry for standalone services, yet Netflix has secured a promising licensing deal with Baidu-owned QiYi. Netflix’s share in Japan remains at 17%, despite launching in 2015, as the country has an older population that is averse to newer technologies.
International markets such as Central and Eastern Europe, the Middle East and Africa have upside specifically for acquired titles, an area of strength for Netflix.
If Netflix continues to dominate globally, then the company could be serving 50-70% of all developed countries and 20% of the developing world. With the limitations of broadcast and linear television, it is unprecedented to have a truly global media company. We will see the full effects of this once broadband penetration increases and 5G speeds bring OTT content at reasonable speeds to mobile devices.
Broadband Penetration and 5G
The OTT market in the United States has taken a decade to surpass pay-TV, with Hulu launching in 2007, popular set-top-boxes launching circa 2008 and Netflix streaming service launching in 2010. This growth has been assisted with the wide availability of high-speed broadband.
You can expect the global market to take twice that long, or maybe thrice. Broadband is slow to non-existent in many countries, although progress is being made. Brazil, for instance, reports a 20% annual improvement in households with 4 Mbps or greater (Netflix requires 3 Mbps or greater).
Japan and South Korea have nearly 50 million people with speeds of 100 Mbps or higher. Fiber technologies and broadband are prominent in Japan and South Korea, along with Australia, Hong Kong, Malaysia, Singapore, Taiwan and Vietnam. There is room for growth once higher broadband rates are achieved in New Zealand, Indonesia, Thailand, India and the Philippines.
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Overall, OTT video is projected to grow to 6.4% of emerging market households, or 103 million in total by the end of 2019. This is up from 19.4 million in 2014. By 2025, digital growth will add over a billion middle-tier consumers for telcos, which will also help to open the market for OTT players.
Media is a universal staple for quality of life, and OTT delivers cheaper content on-demand compared to broadcast or linear television. Some forecasts place 2040 as the pivotal point when essentially every person on the planet will have internet access, up from roughly 50 percent today. With the same data, others are more optimistic and are forecasting 2030.
Gene Munster told CNBC that “Netflix is not going to make a dramatic change to our lives in the next decade.” This misses the point entirely that Netflix is set to make a dramatic change for the remaining 6.5 billion people outside of the United States and Western Europe.
Beyond Subscriber Numbers: User Engagement
Netflix is not only capturing market share from cable TV attrition, but the company is also seeping into Hollywood’s addressable market.Recently, Netflix received 24 Oscar nominations, which is more than any major Hollywood studio or distributor.
High-ranking content isn’t exactly new for Netflix. In both 2018 and 2019, Netflix claimed 19 of the top 20 most streamed shows. According to Christy Ezzell, senior director of TV Time, this is partly due to Netflix’s investment in global audiences, including significant regional investments in foreign-language content and licensing partnerships. For instance, DARK and Elite are foreign-language originals that topped the top 20 list and beat out Amazon Prime on all accounts, including The Marvelous Mrs. Maisel. Notably, two of these are Marvel originals and will count for Disney+ moving forward.
These charts are incredibly important for understanding user engagement as opposed to subscriber numbers. For instance, Amazon is reportedly in the number two spot for OTT services yet is absent from the top 20 list for content. (I suspect subscriber numbers are skewed with Amazon Prime members who subscribe for the free one-day shipping or Whole Foods discounts, yet are more loyal to Netflix in their viewing habits).
Keep this in mind, as both Disney+ and Apple+ attract users with free promotions. Subscribers may sign-up yet use the service very little compared to Netflix’s level of engagement.
Conclusion:
Interestingly enough, many criticize Netflix for continuing its lead at 87% of subscribers through 2023. Again, they are also missing the point that this is the law of large numbers, as a leader cannot hit 100% of all OTT households and now Netflix must look outside of the United States for growth.
Global OTT is not a market we’ve seen before, and there’s nothing to compare it to in terms of scale and subscription revenue potential. To think Netflix is in trouble due to domestic competitors is to misunderstand the opportunity and the slow process of OTT proliferation due to broadband access in undeveloped countries and the forthcoming 5G in developed countries.
The positive here is that the $12 billion debt overhead and competitive landscape will likely spook the market a few times in the near-term and shake up the stock price, as it did following the Q2 2019 earnings. For anyone who wants a global OTT pureplay for the long haul, this should be welcomed.
I’ve included some information regarding Netflix’s stock price below.
Review of Netflix’s Stock Price
Netflix has held the $385 resistance zone since late 2018. This is a significant region that Netflix is looking to retest in the coming days and weeks. Netflix just reclaimed the 50-day and 200-day simple moving average (SMA), which will now act as support. It’s also worth noting that the 200-day SMA is signaling that the long-term trend is pointing downward.
In the chart above, you can see decreasing volume as Netflix approaches the $385 resistance. Although the internals of Netflix are showing a clear uptrend, which is supported by the MACD and the RSI, there is also negative divergence with the price making lower highs while the RSI makes higher highs into overbought territory. It’s important to monitor whether the internals break down through their respective uptrends along with the price.
Netflix is trading between support at the 200-day SMA and resistance at $385. If Netflix fails before testing $385, the structure suggests a setup that can see a retest of the October lows. This structure can be viewed as a reverse cup & handle pattern or, from Elliott Wave, a 1-2 i-ii structure, which will be confirmed below the $250 support. This level will need to be monitored closely if we see a renewed downtrend. However, if Netflix can break above $385 and close with heavy volume above this region, we could see new highs.
Roku’s stock price is up by almost 500% over the past two years. Compare this to the S&P 500, which is up less than 25%. That’s 20X more returns than the average stock.
The upward trend has not been on a straight line. Roku’s stock price has had four major drawdowns that average about 52%. Two of these drawdowns were greater than 60%. Being long a volatile company like Roku since its IPO is not easy, and it especially takes increased conviction to stay long Roku as we approach the end of the current cycle. However, for those that were insightful enough to see that Roku is not a hardware play, nor a content generating OTT play, but instead a Connected TV Advertisement play from inception, have been able to hold Roku through the drawdowns despite market noise.
In this report, I will look at the fundamental case for buying Roku stock. I will also perform a technical analysis of the company’s stock price as entry and exit is crucial for high-growth stocks. This technical analysis reflects the choppy reaction to the company’s third-quarter earnings report.
Roku’s Fundamental Background
Roku is one of the most misunderstood names in technology. A common argument against Roku is that it is a small company with no moat in the streaming industry. They also argue that competition from cash gushing companies like Apple, Google, and Amazon will threaten its lead. In reality, the opposite is true. Roku may be small in comparison, yet it still leads with 39% market share in OTT hardware in the United States compared to Amazon in second place at 30%.
In the most recent quarterly release, the company announced that its users had grown to more than 32.3 million. This is nearly double what the company had in Q2 2017 with 15 million users. The average revenue per user has grown from $11.22 in Q2’17 to more than $22.
The ad platform segment of Roku’s business is the fastest growing and most important. It is also a high-margin business. In the 2017 financial year, the segment had more than $225 million in revenue. This revenue rose to $416 million in 2018. In the most recent quarter, the platform segment grew by 79% to more than $179 million.
Another misconception about Roku is that Roku is in competition with the likes of Disney+, Netflix, and HBO Go because of the subscription service it offers. In reality, the company does not compete directly with these companies, even with its SVOD platform. This is because Roku is mostly in the business of serving adverts and using its data to provide a better ad experience. My partner, Beth Kindig, covers this in more detail in her fundamental analysis (here, here, here) .
The closest competitors to Roku are Amazon and Hulu. Comcast’s Peacock, which will be an ad-supported streaming platform, will also be a competitor, but only domestically. This is because these companies compete for connected TV ad dollars.
Roku has an added advantage because of the vast data it has on its consumers due to owning the hardware. Also, the agnostic nature of Roku’s business makes it favorable for smart TV manufacturers. This is because it does not compete with them on the level that Google or Amazon does.
One final not on Roku, valuation is a constant issue that bears have talked about. It is true that the company appears to be overvalued. The company is valued at more than $15 billion. This is a premium for a loss-making company that is expected to make more than $1.1 billion this year. The company has a forward P/S ratio of 9.9, which is a significant premium. Consider that companies like Amazon, Netflix, and Spotify have a forward PS ratio of less than 6.
Technical Outlook for Roku’s Stock Price
Roku Volume Report
The volume activity in Roku tells us a lot about the current environment we are in, as well as what institutions are thinking. “Smart money,” or institutions, have teams of analysts and professional traders moving large amounts of cash. This typically shows up as massive volume spikes, coupled with noticeable changes in the stock price. The price at which they decide to buy in bulk, or sell in bulk, typically acts as new support/resistance that the price must push through.
What’s noticeable is that around the $127 region, we went from seeing predominantly green volume spikes, to predominantly red volume spikes. The zones in which we are seeing these large liquidations is between the $158-$127 region.
This will be a lot of liquidity to make up, and we usually will see a shift in momentum when the reverse occurs, – i.e., large green volume spikes coinciding with a noticeable shift in price. Until I see us break through the $158-$163 region, with new increased volume spikes, I would be cautious of the current retracement back to new highs.
However, it’s worth noting that this shift could be starting to occur with rising green bars suggesting a renewed interest. I’d like to see institutions take out large positions at current levels before getting excited. So far, the only large volume spikes in this region has been to the downside.
Insider Activity
Insider buying is significantly more notable than insider selling. This is especially true when dealing with a high growth company that just went public; also, there could be numerous personal reasons why insiders are selling. But, it’s worth noting that all the insider activity in Roku since its IPO has been selling with zero buying. Nobody knows this business better than the insiders, and what they do, or do not do, can give insight to where they see growth vs market valuation. It’s worth noting that no insiders are buying their shares at current prices, which I’d agree makes sense if you are a buy and hold investor with a long time frame. However, in the short-term, there could be plenty of momentum left in Roku.
Internal Strength of Roku’s Stock Price
Going into earnings, we had cautioned our readers that $131-$127 was support and resistance was at the $156-$158 region. Any trades in this region on this stock were higher risk. We were correct, as the stock dropped to $119 but quickly bounced back. It has now been climbing and has even posted some marginal gains since prior earnings drop, and we are approaching a critical price cluster.
Simply put, if the stock price breaks $163 and closes well above this price, then I’ll be targeting the above the $200 region before any major drawdown occurs. However, this will require a broader macro bull market. I think it is more likely Roku remains choppy with lower entries available than where it is priced right now.
The internals support this position as well, as of now. In the above chart, the MACD has rolled over, and just recently flipped back up, suggesting strong short-term momentum. Until it breaks above the most recent high on the MACD, this could be a fake-out. The RSI is confirming caution as well. Until we can break the 70 line, which has historically indicated a bullish posture, I’d be cautious on the current uptrend as Roku continues to trade between support and resistance. We are currently oscillating between the 40 line, which has been bullish support and the 70 line, which has been bullish resistance.
Many investors are playing momentum with Roku right now, and we believe this is the correct strategy at current prices. Going long Roku today should be done with stops in place or a systematic exit strategy to protect any gains. Therefore, Elliott Wave is the preferred method for increasing the probability for successful entries on long positions for a momentum trade, as well as set ideal targets for a more long-term time frame.
Above is the 30-minute chart of Roku going back from it’s all time high. My Primary Elliott Wave count has Roku’s stock price completing its larger degree Wave 3 push just above the 138.2% extension at its all-time highs. This is historically a lower top for a typical target for a 3rd Wave, which usually targets the 161.8% extension.
If Roku can break back above the 78.6% retrace and then take back the 138.2% extension around $163, we will likely see a push to the 168.2% extension before any significant drawdown that would constitute a 4th Wave correction (this is shown as an “alt (3)” and “alt (4)” on the chart). As of now, the evidence supports that Roku is in its 4th Wave correction, and as long as it stays below to current resistance, there will be chances for lower entries on a more long-term basis. However, if we close above $163, I will likely add to my current position with tight stops to play renewed momentum as Roku powers to new highs.
As Apple’s stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine. It produces around $50-$60 billion in free cash flow annually, with reserves of over $100 billion. It is extremely kind to shareholders, with one of the largest buyback programs on the Street. In fact, Apple has spent around $120 billion in stock buybacks since the beginning of 2018, and kicks out a dividend. Apple is, without question, one of the greatest businesses the world has ever seen.
However, there are times where great businesses do not always make great stocks at times. If we look at the current valuations, Apple’s stock price is trading with a P/S of 4.5, a P/E ratio of around 25 and a price to free cash flow of 20, as of the writing of this report. While these valuations are relatively mild compared to some of the valuations being shopped around in the tech industry, for a company with a market cap of $1.3 Trillion, these valuations suggest future growth in order to justify current prices. It is here, with their future growth prospects that I see caution.
Apple’s Stock Price is Up While Revenue is Down
In 2019, the company had revenue of $260 billion, down from $265 billion in the previous year. Analysts originally expected the company’s revenue to grow to $274 billion, or 5.3% this fiscal year, and around $294 billion or 7% in the following fiscal year. This will be slightly below the 7.2% growth that is expected among information technology stocks.
In the latest quarter, its growth rate was just 1.8%, significantly lower than what other FAANG companies reported. Facebook revenue grew by 28% while Amazon rose by 23%. Netflix and Google had revenue growth of 31% and 20%, respectively. Even Cisco grew by almost 5%. And for further comparison, the US economy expanded by 1.9%.
Apple’s poor growth would have tanked any technology stock, yet Apple’s stock price is up 60%. Though I believe Apple has the cash as well as the capability to pull numerous pivots in its future, the loss in revenue will likely accelerate before these pivots can manifest, which will compress margins, and thus affect current valuations.
iPhone Saturation – Will it Affect Stock Price?
If we dig deeper into their latest revenue report, we discover that smartphone sales declined YoY by 15%. Saturation is an inevitable phenomenon for revolutionary inventions. For example, Utilities and wireless phone coverage were once considered hyper growth sectors at one point in time, but the inevitable saturation took hold, leading these companies to now be considered defensive value plays. Saturation appears to be taking hold in the smartphone market, which is why we are seeing a deceleration in smartphone sales YoY; with an expected 2% fewer sales per year going forward.
Furthermore, with saturation, we see manufacturers start to slash prices to capture fewer units sold. This quarter, Apple reported that iPhone sales declined by 9% since the previous year and that they are also reducing the price of their new iPhone 11. Both news items point to the reality of market saturation.
The iPhone is arguably the greatest tech driver in history, as well as Apple’s primary source of revenue. So, Apple will have to cover the losses with their other products to make up the difference. This is where I see the inconsistency between the stock’s valuations and their current offerings.
Services
Apple’s services generate revenue through various subscription fees. These fees come from several well-known Apple services, including iCloud, iTunes, Apple Music and various types of apps.
Although these services grew by 18% this last quarter, the total revenue generated was only 37% the size of iPhone sales. This level of growth is simply not enough to cover decreasing revenues from Apple’s iPhone sales.
Furthermore, there are also concerns in the service sector. The problem is that the services that Apple offers have relatively lower margins than the iPhone. A good example of this is Apple Music. Apple doesn’t disclose Apple Music’s gross margins, but going by Spotify’s own margins, we have every reason to believe that Apple is similar. Spotify’s gross margin is just 26%, which is smaller than Apple’s iPhone net profit margin. It’s important to note that the services segment of Apple is tied to the iPhone and may experience slower growth as the smartphone market continues to saturate.
Apple +
There’s also a lot of hype around Apple TV+’s potential at filling the growth gap. According to the Wall Street Journal, Apple is spending more than $6 billion on new content, and it’s only likely to go up as the streaming war continues.
At current prices for the service, it’s impossible for Apple to make a profit even with a hundred million subscribers. Apple can still be a contender in this crowded space, but it will likely take time, and be more of a cash drain than a generator in the short-term. Meanwhile, smartphone saturation is only going to continue, which means that Apple TV+ will not be able to solve Apple’s current revenue problems.
Apple Pay
Apple Pay is another service that Tim Cook talks about repeatedly. During the latest earnings call, he revealed that the service had surpassed PayPal in terms of volume of transactions. The service is also expanding into various markets. Additionally, Cook also praised Apple Card, a new product developed in collaboration with Goldman Sachs that promises to expand Apple’s revenue.
Apple Pay has the potential to generate a large cash flow, but there are questions about how big it can get. In the trailing twelve months, PayPal had a gross revenue of $17 billion and a net income of $2.53 billion. Visa and Mastercard had a combined revenue of $38 billion and a net income of $17 billion. So even if Apple were to dominate this market, its consolidated net income will not be sufficient to cover the loss in iphone sales. And, more importantly, it will take time to take market share, which will not solve the revenue issues Apple currently faces.
Apple Wearables
Another area that’s worth looking at are Apple wearables. In the last quarter, revenue from wearables, home and accessories rose by 54% to $6.5 billion. This growth was driven by the success of various Apple products, particularly Apple Watch, Airpods, and BIS products.
These wearables are great products that do have higher margins, just like the iPhone. The big question, however, is if they can grow fast enough to offset losses in iPhone sales. Despite its great performance, Apple’s wearables, home and accessories business is still behind the Mac division, which earned $6.9 billion during the fiscal fourth quarter.
Meanwhile, Apple’s iPhones generated $33.36 billion in revenue this final fiscal quarter, despite a 9% decrease year on year. So the important point in all this is that, despite their tremendous growth, Apple wearables and accessories are just not in the same league as iPhones.
Buybacks and Apple’s Stock Price
Any other tech company with decelerating revenue, and the likelihood of continued deceleration in the near term, while facing an end of cycle environment that will eventually affect the consumer, would not see their share price increase to such valuations. So, it’s worth noting the importance of one of Apple’s key components in their current strategy, which is not a permanent solution.
Apple has turned to buybacks to boost its stock and spend its cash hoard. Since January last year, the company has spent more than $120 billion on buybacks. The question, though, is how effective these buybacks are to retail investors.
Large companies with growth problems have used buyback programs as short-term solutions for sluggish performance. In the short-term, share repurchases can help boost a stock price. However, in the long-term, Apple’s share price growth will depend on the performance of certain specific segments. The chart below shows Apple’s diluted EPS growth in the past five years.
Source: Ycharts
Technical Outlook for Apple’s Stock Price:
Structure
As a technical analyst, I do not go against the trend until I see either a rewarding risk/return set-up at key levels, or a noticeable shift in trend emerges. Apple is currently in an incredibly strong uptrend since bottoming in December of 2018; however, Apple’s stock price is at a significant level.
It’s worth noting that it’s 2019 uptrend appears to be in a corrective fashion – a series of 3 waves up, which is always point of caution. Typically, when I see this, it points to a correction in a larger degree prevailing trend.
Furthermore, if we take the length of the first wave up off the December low to its peak in May of 2019, it went up 51.63%. After bottoming out in July of 2019, Apple’s stock price began the current wave up. You’ll notice that Apple’s share price is at the symmetrical percentage growth of the first wave – 51.63%, which coincides with the 100% extension.
In technical analysis, the market tends to move in symmetry, especially in corrections, and the $258-$262 range will act as major resistance for Apple’s continued charge up. This is exactly what we have seen as well, as Apple’s stock price has been hovering around this level for many trading days. If it can close above the $262 range and hold on to that region, I believe there is a strong possibility that it will trade up to the 250% extension of the 30-year cycle uptrend of around $300.
However, if Apple cannot break above the $260 range, it could retest the $222 price range. If it falls below this range then the yellow target box will be in play, thus confirming that the uptrend from the December low was merely a powerful correction in a much larger decline.
If we look at Apple’s internals, a few points jump out. For one, the volume is decreasing as the stock price is increasing, suggesting there’s not broad participation in this uptrend, and that may be the result of weak buying volume on top of even weaker selling pressure. If this is the case, as soon as buyers get exhausted, we could see a sharp decline.
The MACD is currently at its highest point in Apple’s history, the second highest was in September of 2018. An elevated MACD is a bullish sign, but when we hit extremes, it becomes a point of caution. The RSI is in a current uptrend along with price. If this uptrend breaks along with the price, we could be in for a retest of important support zones. I will be watching the RSI for a clue to a change in momentum.
Knox Ridley runs a premium site alongside Beth Kindig. You can check out her fundamental analysis on Apple on this site.
Roku is a company that has proven nearly every bearish prediction wrong with consistent revenue growth despite being surrounded by steep competition and tech heavyweights in over-the-top media.
Roku investors that have been long since its IPO have lived through three fifty-percent drawdowns. Therefore, the reaction to earnings this quarter was unlikely to phase anyone who has followed this stock for any length of time.
I encouraged my readers to not be phased by market reactions when Roku was priced at $30, when it was priced at $60, and when it was priced again at $30. During that sell-off, I said the company would become a tech darling and reach $100 in stock price in two years, which was bold to predict 200% returns. Of course, the company went on to reach 350% returns in a short time span of about one year.
The market received Roku earnings report on Wednesday after the market closed. Streaming hours passed 10 billion hours in the third quarter, while active accounts increased to more than 32.3 million. The most impressive number in the Roku quarterly earnings was the average revenue per user, which increased to $22.58. This number has more than doubled since the second quarter of 2017.
The Roku earnings report showed that quarterly revenue increased to more than $261 million. Platform revenue grew by 79% while ad revenue more than doubled. This was a 50% YoY growth and was above the consensus estimates of $256.9 million. The company lost 22 cents a share, which was 6 cents above the consensus estimates of 28 cents a share.
Overall, the company beat the consensus estimates, raised guidance, reported strong user growth, and increased ARPU.
However, Roku has double-digit negative EPS and will for some time. Roku financial statements show that EPS is declining QoQ. Its consensus EPS forecast of -$0.28 compared to -$0.09 in the year ago quarter. Annual EPS won’t improve either, per analyst consensus, with -$0.50 ending in fiscal year December 2019 and -$0.43 ending in fiscal December 2020.
We’ve already seen a few companies get crushed by the market if they have a small miss, which is the paradox for growing tech companies who are often penalized by the market by foregoing earnings to capture peak growth, which in turn, becomes rewarded by the market once it materializes into earnings. In other words, if Roku misses anytime in the next couple of years, it’ll be with EPS rather than revenue. The market, which is confused by the many OTT streaming services and hardware players, will penalize Roku. This most certainly will not be the last time the stock sees double-digit pullbacks.
I also foresee the market abandoning Roku and many other solid tech stocks that aren’t profitable yet during the inevitable value rotations. Keep in mind, investors also did this with Netflix, Google, Apple, Microsoft and Amazon during 2009.
Misunderstood Competition is an Edge
As is always the case, the market has a record of underestimating small companies that are battling with other big companies like Apple, Disney, Google, and Comcast. This is why Roku still remains one of the most volatile stocks in the market. This also proves the affinity investors have towards brands rather than technology. Yet, it is the latter that drives growth in new markets.
The nuances in strategy and technology are terribly important to understand in the crowded OTT space as it helps to have conviction when a stock drops 50% or more, yet then goes on to be the best performing stock of the 712 stocks with a market capitalization over $10 billion in 2019.
Let’s break down what I mean by Roku having very little direct competition.
SVOD vs. Connected TV Ads
Roku does not compete with Disney+, Netflix, or HBO Go because these are subscription services. Subscription video on demand (SVOD) is in a category of its own as the opportunity Roku is capitalizing on is Connected TV ads (CTV Ads). Advertisers are paying a premium for CTV ads, which is Roku’s market. The distinction between markets is important, and one that Wall Street missed when discounting Roku as a long-term opportunity by labeling it a hardware company for its first couple of years on the market.
Roku directly competes with Amazon and Hulu, as they compete for Connected TV ad dollars. However, as the market is well aware, data is king as it allows for better targeting. Hulu has to barter data as it’s a single application without a platform or hardware (i.e., it shares and connects third-party data, including with Facebook). Third-party data is always weaker targeting than first-party data and could be subject to privacy issues.
Razor-Razor Blade Model
Discounting the hardware and taking a loss is an excellent strategy to maintain a moat on data for advertising. Both Amazon and Roku own the hardware, and at current prices, the hardware likely causes negative or very thin margins. This is similar to the razor-razor blade model, where you discount the razor to sell the razor blades for life.
This positions Amazon and Roku for first-party data across OTT applications. Anything data related is subject to privacy issues and anti-trust issues. This is at the core of the controversy with Facebook and Google.
Roku is again set apart here, as the company only does OTT. The company does not share the data beyond the OTT player it owns. Amazon, however, is collecting data in a way that could come under anti-trust scrutiny as they take e-commerce data and broker this on the OTT player, which is anti-competitive with other ad exchanges.
Amazon is well aware of this, and is being proactive rather than reactive by opening up its demand-side platform to other DSPs, such as The Trade Desk, which was announced in July of this year. On a side note, Facebook learn from Amazon’s playbook as reputational damage is hard to shake.
Roku, however, does not need to worry about this as data never leaves the OTT hardware that they own, where they have a first-party relationship.
Valuation:
Connected TV ads are ballooning because they combine audience data with the viewability and completion rates of linear television. Roku’s valuation at 14 price-to-sales seems high at first, yet the one-year forward price-to-sales is trading at 9.3 due to the forward growth opportunity in Connected TV ads. Roku earnings estimates for 2020 and 2021 are $-0.29 and $0.6178 respectively. Therefore, the market may still be lukewarm with knee jerk reactions throughout 2020.
For example, last November, video-first SSP Beachfront reported that ad requests for CTV had increased 1,640% from November of 2017. While this is only one company’s growth in a single segment, the opportunity is so ripe, it’s hard to quantify. More astonishing is that Connected TV ads surpassed mobile last year for capturing the largest number of impressions and video completion rates.
Roku’s revenue growth will be exciting; however, the company is not likely to be profitable until 2021. In the third quarter Roku income statement report showed that revenue grew by almost 60%. This was almost double that of Netflix and triple that of Google.
Traditional metrics show that Roku is not a cheap company to own. Its forward EV to EBITDA ratio of 393, which reflects the lack of profitability. It’s not surprising the stock is trading in the range of $127-$131 following earnings, which was former support.
Depending on macro trends, we could see Roku trade around $100 again as this is an important psychological level, as shown below. It is also along the 50% Fibonacci Retracement level and along the 200-day exponential moving average. Long-term, I see Roku as one of the most promising tech stocks on the market and have provided projections to my premium subscribers.
Knox Ridley, technical analyst, will be covering Roku in-depth with technicals next week. He has guided many successful entries on this stock for our premium members, including entries lower than $100.our premium members, including entries lower than $100.
A version of this analysis appeared in MarketWatch prior to earnings on November 6th, 2019.A version of this analysis appeared in MarketWatch prior to earnings on November MarketWatch prior to earnings on November 6th, 2019. It has been updated and lengthened post-earnings.
The Netflix critics who point towards massive debt load and the unsustainable $12 to $15 billion annual content production costs causing a bleeding of free cash flow are not wrong to question these things. They are absolutely correct in thinking this company could be a ticking time bomb.
I’ve always avoided writing negative analysis on this company because I hesitate to think Reed Hastings doesn’t have plan. He’s one of the better entrepreneurs of the past decade as far as execution and hard-to-nail pivots.
Most naysayers refuse to recognize the wide margin Netflix has in OTT subscribers compared to the competing streaming services. This stands at 87% in the United States and 70% in developed, English speaking countries. They claim 50-60% in developed, non-English speaking countries.
Amazon Prime is supposedly in second place, yet they are entirely absent from the Top 20 most streamed shows. I don’t trust the numbers here as Prime is many things beyond OTT and some of these subscribers could have Prime for shipping or groceries, yet remain loyal to Netflix in their viewing habits. Of the Top 20 most streamed shows globally, Netflix claimed 19 of them (although the number should be adjusted for 17 shows as Disney’s Marvel counted for two of the rankings).
Despite the noise of new OTT entrants, the projections from unbiased analyst firms continue to put Netflix at a wide margin with 87% in the United States.
The real question is what will Netflix’s penetration be globally? Half of the world does not have broadband and many geos that do have slow speeds. I believe Reed Hastings is gunning to be the first truly global media company. The barrier to entry is high for global and the only other streaming service that has the ability to license content internationally is Disney.
If Netflix reduces its content bill over time (the company has stated this is the peak spending year), and meanwhile, simply keeps doing what it’s been doing on the execution front, it has the possibility to reach the majority of global households.
I do think they’ll have to offer a reduced subscription fee for catalog content and keep the higher subscription fee for premium and new content in order to fit global household budgets, but the numbers are there .
The slow proliferation of fast broadband and OTT has the market somewhat confused right now. The Untied States is far ahead with OTT accessibility and this has skewed how investors see this opportunity. They are not considering that Netflix’s biggest headwind is global broadband speeds. They are thinking this is a turf war in the United States, and therefore, the debt load looks prohibitive for only 150 million households.
I don’t get to choose the titles of those articles. If I could have chosen the title, it would have been “Get Netflix When It’s Dirt Cheap and while Broadband Penetration is Low.”
Below is some technical analysis from Knox on entry scenarios. If we reach his target number, we will update you.
This isn’t an earnings call. Netflix could beat earnings. I just think it’s pretty high risk with the market perception around OTT subscription services right now with Apple, Comcast, etc.
p.s. I have a PDF coming for you tomorrow on Telaria, the small cap focused on Connected TV ads.
Netflix Technical Analysis
by Knox Ridley
The Very Big Picture (Weekly Chart)
Going back to the beginning of its trading, the weekly chart of Netflix is interesting. To see a stock as explosive – in both directions – like Netflix, follow a uniform trend channel, as well as adhere to extensions on such a large time frame, actually shows a sense of order to its path upwards.
The blue roman numeral count shows the very large degree cycle count, which operates on a time frame that is not as useful to most investors. That is, unless we are coming close to the end of a wave and the beginning of another, which I do not see happening just yet.
My main count has us still within this larger degree 3rd Wave in blue roman numerals. This means, if we go to a lower degree of time within this cycle count, we are looking at the primary count in orange. This count will be more useful to us because we have topped out in Wave 3 and are correcting into Wave 4.
Third Waves are typically accompanied with a trend’s peak momentum, which is what we are seeing when looking at spike in the MACD. Being in a 4th Wave, there are a number of price clusters that could find final support.
There’s a confluence of extensions highlighted on the graph: the pertinent extensions to the cycle count in blue roman numerals are on the right in blue; (2) the extensions of interest to the primary degree count in orange is on the left in orange; (3) the 23.6% retrace level to the internal red count is also in red.
As you can see, there’s a confluence with these important points, which will be major support regions in any significant pullback. Also, keep in mind the 23.6% retrace level is on the chart to offer perspective on just how far Netflix can reasonably fall.
Please keep in mind we are talking about a primary degree count, which started in 2005, and in 2019 we are just now completing Wave 3. So, this correction could take weeks to months to play out. In the meantime, we can play the momentum on a lower degree, which is highlighted below.
Close Up
Zooming into the 2 hour chart, we get a better understanding of specifically where we are within this larger trend that is unfolding. We are in an A,B,C correction, where (A) bottomed at the December low in 2018, (B) peaked in June of 2019, and we are currently in the final (C) wave, which appears to be unfolding in a 5 wave pattern, and is highlighted by the red letters red.
Notice the RSI making higher highs, which is putting it into overbought territory (above 70), while the price action is making a lower higher. This is highlighted with the red circles, and is a negative reversal patter, which suggests more downside is on the horizon.
The final targets I have for this (C) wave push, is at minimum the $227.50, which will close the gap-up from January of 2018. However, the more likely target will be the A=C price around $212-$211. I would be interested in seeing how the stock holds support around this region, and see how the price behaves before committing. If this level does not hold, then the extensions in the weekly chart will come into play, and we could be in for a more aggressive correction.
Miracles do happen, and if we close above the $335 resistance level, which is highlighted just below the green arrow, I would consider Wave 4 over, and for us to be in the primary 5th wave push to all new highs. We feel this is unlikely due to the headwinds the company faces – some that are very real headwinds and some that are driven by perceptions.
Momentum swings in both directions. Last week, we woke up to Roku at a 20% drawdown in a single trading day. In fact, within 2 weeks, Roku’s price has fallen 39% from its all-time highs. If you are new to Roku, it would be easy to panic. However, for those that have been involved with Roku from its IPO didn’t even flinch. Within 2 years of trading, Roku has had 3 drawdowns of around 50% from peak to trough. The largest drawdown has been 64.47%, and without a strong conviction, there’s no way an investor could sleep while holding Roku for the long haul.
Whenever we see the market get it wrong, again, on Roku, and the technical break significant support, as a Roku investor, I don’t get afraid, I get excited. It’s times like these that I look to add to my Roku position as I have personally outlasted every Roku drawdown since it went IPO. The point of this report is to gauge the probability of Roku’s current drawdown, which can act as a reasonable point of entry.
Elliott Wave
Roku’s impulsive chart pattern is unfolding nicely. My primary count has us completing a blow-off top 3rdwave, highlighted in the blue numbers, where the explosive 3rdwave, with peak technical momentum, pierced the upper range of the trend line. We are currently starting the 4thwave down and when we zoom into the 1-day waterfall event, we can see a clear 5-wave pattern down, insinuating a 5-3-5 correction is underway. I estimate this correction will take us to the 50% – 61.8% retrace level ($96-$77), after we get a corrective bounce.
These levels not only coincide with the trendlines developing, but they also coincide with the 100% extension and the 78.6% extension. I see this area as a strong region to expect the pullback to find support, and depending on the broad market, could be an excellent place to add to, or begin building a position.
Basic Technical Analysis
Some of my favorite gauges for market health and actionable decision making is based on basic trendline/momentum data.
First off, I anchored a Volume Weighted Moving Average (AVWAP) to the December low, which is the momentum line highlighted in pink. This moving average clearly shows that, even with a near 40% drawdown, the bulls are still in control. This moving average lines up perfectly with the 200-Day moving average, highlighted in blue. These 2 levels will act as major support as they move into the targeted support ranges, strengthening the support within this region.
Moving onto the broken support regions, you’ll will notice the 3 separate tops (one of which we are currently experiencing). Below these tops you’ll notice the line in the sand support region, highlighted in dotted black. Roku has definitively broken through the current support, after breaking a significant trend line, also highlighted in black. Notice the red arrows. There are 3, all lining up with the exact moment the RSI, MACD and price broke their respective trend lines from the December low.
I would urge you to be cautious trying to buy the dip too soon in Roku. I do believe we will see a corrective bounce from over sold levels, but I expect it to be corrective before we see the final drop into the 50% – 61.8% retrace zones. You’ll notice the histogram in the MACD, dropping to levels we have never seen with Roku. When we see such a sharp drop in the MACD, more times than not, it’s an indication of too soon, too fast, which leads to the very least a bounce. Also, you’ll notice that the RSI is right on the 30 line, indicating oversold levels as well.
However, while we are looking at the RSI, I want you to notice how many times the RSI broke the 40 line, which in a bull market the RSI will usually not break, and then dropped to the 30 line. Three times this occurred, and 2 of those time lead at least a 50% drawdown. I use this as further evidence to hold off on adding to Roku at these levels.
In conclusion, I believe the $96 level will be the next support region that Roku will react to. It’s due for a bounce, I’m expecting at minimum to the $115-$120 region, but this bounce should be corrective before we drop to the 61.6% region. I will look to add to my position around this price cluster.
Will Roku miss earnings? I believe Roku will miss earnings at times, but for the big picture, Roku is at the center of an important trend in advertising and this will make for decent returns now and sizable returns in the future. I also don’t play the earnings game often with stocks as my analysis does not change monthly or quarterly. My conviction on Roku is high and can withstand trade war news or a fledgling quarter, which is normal for smaller companies on the edge of incipient trends.
What Investors Got Wrong With Roku
The first thing Wall Street got wrong with Roku is that investors thought Roku was a hardware player. Although it is clear now that the ad platform is what will drive the profits, this wasn’t evident in the financials for a few earnings reports. My three pieces of analysis in 2018 were the opposite; I made my readers aware the ad platform was where the growth potential was.
The second thing Wall Street gets wrong is assuming Google or Amazon can dominate over-the-top television because they are Big Tech and smaller companies don’t have a chance. Google struggles here and recently raised the prices on YouTube television to $49, which for the most part, negates the purpose of cord-cutting when you add a few subscriptions like Netflix or HBO Go, and end up at the monthly cost of cable. Amazon is pushing into ads for OTT, however, there will be privacy regulations to face as the data powering those ads is being brokered without consent from e-commerce and Prime purchases. You can ask Facebook how that is going for them.
Roku has all of the pieces to the stack. The hardware is a razor-razor blade model that locks in their ad-supported platform. They’re OTT-only, and this prevents privacy issues for the data they collect from the device (this is why Apple is always in the clear with privacy issues – data stay s on the device).
Interestingly, the consensus EPS forecast for Roku is negative $0.24 compared to negative $0.07 same quarter last year with analyst expectations of declining growth. Meanwhile, Roku had posted EPS of $0.05 last quarter. Here’s a screenshot of Roku’s earnings per share vs. consensus:
TradeDesk is also a Connected TV advertising player and reports on May 9th with analysts expecting declining growth from the previous quarter with estimates at $0.07 per share.
With that said, advertising is driving record profits for many companies who have already reported this quarter, such as Facebook and Twitter. This is why I’m surprised (and don’t necessarily agree with) the low analyst expectations for both Roku and TradeDesk as these expectations of -$0.24 for Roku and $0.07 for TradeDesk are some of the lowest in these stocks’ earnings histories (1+ year or more).
My Opinion “Long on Roku Even if They Miss Q1 Earnings”
That was my headline last May in 2018 even though Roku did not miss Q1 2018 earnings. My stance on this stock remains the same. Roku is a core holding of mine because of the mega trend towards Connected TV advertising. To put it simply, and as I wrote before Q1 2018 earnings were reported, Roku beating or missing earnings is not my focus for a long strategy based on an important trend. I fully expect tech companies to miss earnings from time to time (this creates better buying opportunities). This won’t change my conviction that Connected TV advertising is on an important upward trajectory.
Here’s some more information on the Connected TV market:
“Two of the big trends in digital media aren’t compatible: The drive to enforce viewability standards and the shift to mobile, particularly apps.” – Digiday
Viewability issues are a serious issue for big brands who are averse to mobile in-app advertising because it’s too challenging to track. In addition, many big brands do not need immediate purchases which is called “purchase intent” – which is mobile’s main value over television.
For instance, Coca-cola doesn’t expect you to buy a soda immediately after seeing an ad. Audi doesn’t expect you to buy a car immediately either. So, a lot of the benefits of mobile aren’t worth the downside to these big brands. Advertising budgets shifted to mobile because they had to find audiences, not because it’s a superior method to advertise.
Here’s how the two compare:
Pay TV has high completion rates as viewers are comfortable in their homes and better prepared to receive advertisements.
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Mobile offers audience data to better target viewers based on individual preferences.
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Connected TV advertising, which is Roku’s specialty, combines the best of both television and mobile. It offers 100% viewability and completion rates with the audience data and dynamic ad insertion found on mobile. Forbes covered this in a recent article which stated Ad Supported OTT is the future reporting OTT ads have a 97% completion rate and 100% viewability.
In a recent study by FreeWheel, 200 billion video starts found OTT ads had ballooned from 2% to 32% in a four-year period due to heavier investments from advertisers.
In the Q2 2018 Video Advertising benchmark study released by Extreme Reach, a tech platform for video ad campaigns, connected TV impressions overtook mobile, accounting for 38 percent of all video ad impressions down from 33 percent in Q1.
“CTV is clearly on the path to becoming the dominant platform for media consumption, and premium inventory is the most sure-fire audience draw.”
– Mary Vestewig, Senior Director, Video Account Management at Extreme Reach.
AppNexus, the world’s leading independent advertising technology company, announced in July of 2018 that advertiser spend in its connected TV marketplace grew 748% year-over-year versus the second quarter of 2017 and 68% quarter-over-quarter. AppNexus currently sees 20 billion monthly connected TV impressions per month.
From an investment standpoint, the implications of attracting more advertising dollars than mobile is enormous. Big brand budgets have been looking for a solution to traditional television that isn’t confined to the attention span and limited screen size of mobile viewers. With Roku, that option is finally here.
Please note: I’ve also covered TradeDesk, another stock doing well by capturing the Connected TV advertising trend. You can read that analysis here on FATrader and why the risks with TradeDesk have personally kept me from buying the stock although many of my readers have seen 400% returns on $TTD.
This analysis is not an earnings call. The purpose of this article is to revisit a few trends and predictions I made around this time last year in regards to Roku.
Roku’s earnings report for Q3 is scheduled on a potentially volatile trading day depending on how the broader markets react to the mid-term elections. The uncertainty around this outcome, along with rising rates, geopolitical trade uncertainty, and a host of companies tempering their Q4 outlook has caused a style rotation, which has pummeled tech stocks. Regardless, Roku is a mid-cap growth stock in the tech sector that will continually prove itself against headwinds as the company is poised to become one of the most opportunistic growth stories in the market by 2023.
The reason for this is simple: connected TV advertising combines the high engagement of traditional television with the audience targeting capabilities of mobile. These previously two competing forces will combine to create the next advertising phenom, and Roku will emerge as the tech darling of this ever-important shift in ad dollars.
Pay TV Attrition is a Blood Bath
Pay TV has had better decades. The peak for Pay TV user growth in the United States occurred in 2011 when it began an inevitable erosion due to bloated, costly monthly packages, a lack of flexibility for on-demand, and advertising-stuffed programming choices. The following year, pay TV subscribers fell by 8,000 in 2012, which accelerated to 164,000 subscriber losses in 2014. Three years later, those losses grew 20x to a staggering 3 million subscribers (source: Leichtman). And by 2023, live-linear OTT video subscriptions will surpass traditional broadcast TV[1].
Cord-cutters have driven a formidable marketplace. In fact, the global OTT devices and services market will reach $165 billion in 2025 compared to $29 billion in 2015[2].
Roku offers the most synonymous OTT business model with cable and satellite TV providers and can capitalize long-term on this massive subscriber loss by leveraging its advertising, audience development and content distribution services, which make up 89% of gross margins from the platform. As of Q2 2018, if Roku were a traditional cable TV company, the 22 million active subscriber base would rival Comcast as second largest distributor of content in the United States. Only AT&T has more with 47 million DirecTV subscribers. Compare this to Charter Communications, which has a $65 billion market cap and only 16 million users or Comcast with a $171 billion market cap with the aforementioned 22 million subscribers. Roku’s market cap is at $6 billion with shares priced at $56 with the same number of users as Comcast.
The Next Phenom in Tech is Connected TV Advertising
I’ve covered Roku extensively in previous analysis including strengths on how the company is vendor agnostic, player vs platform revenue and the company’s global potential. Connected TV advertising, however, is by far the most important piece for Roku’s trajectory.
Bear with me here as I talk about some of the problems and technicalities in the advertising industry, and why Roku is well positioned.
As Digiday puts it, “Two of the big trends in digital media aren’t compatible: The drive to enforce viewability standards and the shift to mobile, particularly apps.”
Viewability issues are a serious issue for big brands who are averse to mobile in-app advertising because it’s too challenging to track. In addition, many big brands do not need immediate purchases which is called “purchase intent” – which is mobile’s main value over television.
For instance, Coca-cola doesn’t expect you to buy a soda immediately after seeing an ad. Audi doesn’t expect you to buy a car immediately either. So, a lot of the benefits of mobile aren’t worth the downside to these big brands. Advertising budgets shifted to mobile because they had to find audiences, not because it’s a superior method to advertise.
Pay TV has high completion rates as viewers are comfortable in their homes and better prepared to receive advertisements.
undefinedundefined
Mobile offers audience data to better target viewers based on individual preferences.
undefinedundefinedundefined
Connected TV advertising, which is Roku’s specialty, combines the best of both television and mobile. It offers 100% viewability and completion rates with the audience data and dynamic ad insertion found on mobile. Forbes covered this in a recent article which stated Ad Supported OTT is the future reporting OTT ads have a 97% completion rate and 100% viewability.
In a recent study by FreeWheel, 200 billion video starts found OTT ads had ballooned from 2% to 32% in a four-year period due to heavier investments from advertisers.
In the Q2 2018 Video Advertising benchmark study released by Extreme Reach, a tech platform for video ad campaigns, connected TV impressions overtook mobile, accounting for 38 percent of all video ad impressions down from 33 percent in Q1.
Here’s a quote from Extreme Reach:
“CTV is clearly on the path to becoming the dominant platform for media consumption, and premium inventory is the most sure-fire audience draw.”
– Mary Vestewig, Senior Director, Video Account Management at Extreme Reach.
AppNexus, the world’s leading independent advertising technology company, announced in July of 2018 that advertiser spend in its connected TV marketplace grew 748% year-over-year versus the second quarter of 2017 and 68% quarter-over-quarter. AppNexus currently sees 20 billion monthly connected TV impressions per month.
From an investment standpoint, the implications of attracting more advertising dollars than mobile is enormous. Big brand budgets have been looking for a solution to traditional television that isn’t confined to the attention span and limited screen size of mobile viewers. With Roku, that option is finally here.
Subscription video-on-demand (SVOD) comprises 40 percent of the OTT market with the majority of the revenue coming from the United States. By 2022, SVOD penetration will be 132% of US TV households with many homes having more than one SVOD platform[1].
Total SVOD is expected to reach 171 million by 2022 – up from 59 million in 2016 reflecting a 53% increase.
Previously, viewing data and ratings on SVOD (subscription video on demand) such as Netflix (NFLX), Hulu Plus, and Amazon Prime and other OTT content was not disclosed even by Nielsen (NLSN). However, in a recent interview, Nielsen COO Steve Hasker revealed four previously undisclosed statistics about SVOD such as 89.5% of SVOD content is primarily viewed on the television glass whereas 11.5% is viewed on smartphones and tablets.
Of this time, 80% is spent on catalog programming whereas 20% is spent on original content. For definition purposes, Netflix is original content and something Roku or Amazon Prime offers is considered catalog programming.
Meanwhile, as competition increases, the costs for original programming are escalating with Netflix spending $8 billion in 2018 in order to remain competitive for a small piece of the pie (20% of how time is spent).
Roku has held firm on not creating original programming and the statistics support this. The costs for original programming are likely to escalate as HBO, Showtime, Apple, and now Disney developing its own channel for 2019, will continue to compete for this space.
In addition, subscribers pay for quite a few premium $8+ subscription channels, which will eventually lead to subscription fatigue – not to mention mitigate the reason cord-cutters leave pay TV services – which is to lower costs. For a subscriber with YouTube TV ($40) and three premium channels ($24-26), they are paying $65+ per month. This pricing will meet resistance by cord cutters and ad-supported OTT will continue to be a solid choice for viewers.
Conclusion:
Roku is executing on a market trend that will defy typical growth trajectories. Brand budgets are migrating towards Connected TV as a superior method of advertising over mobile. The Roku Channel launched in October 2017 and is already a top 5 channel by active account research. Investors should keep a close eye on platform revenue, which was up 96% YoY to $90.3 million in Q2. The trailing 12-month ARPU in Q2 increased 48% YoY to $16.60 and was “driven by strong growth in video advertising as we continue to capture more share of TV ad budgets,” as the company stated in their shareholder letter. Due to connected TV advertising trajectories, I am long on Roku for the next 3-5 years.
Ultra HD televisions are one of the fastest-growing segments in the history of consumer electronics. Within the first three years of shipments, 4K/UHD overshadowed HDTVs by nearly 4x with 16 million units shipped compared to 4.2 million units1. Since then, rapid penetration is occurring globally with 35 percent of all U.S. households forecast to have a UHD television by 2019, followed by the United Kingdom with 31 percent, 25 percent in the European Union, and 24 percent in China. Global units shipped reached 82 million in 2017 up from 53 million in 2016. .
The global 4K TV market is expected to reach 380.9 billion by 2025 due to enhanced graphics, the pressure for manufacturers to reduce prices and the popularity of ultra-high definition (UHD) content2.
The rate of growth of 4k shipments is at 70% growing from 83 million 4K devices in 2016 to 1.2 billion in 20213. While flat panel TVs are the largest segment of devices in 4K format, streaming media adapters, set-top-boxes, mobile devices, Blu-ray players, and game consoles follow closely behind. Following the popularity of 4K devices, there has been a growth of 4K content. Initially, 4K UHD content was available for live sports and some video on demand. Today, 4K content is seen as a premium offering albeit an expensive one with a digital copy of a 4K movie costing US $30.
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Revenue from the display market will grow from $18 billion in 2015 to $52 billion in 20204.
BT Sport was a pioneer of 4K broadcasts, and Netflix and Amazon were also early to the market to deliver 4K/Ultra HD content with hits such as Stranger Things and House of Cards. Today, most major broadcasting companies and content providers have joined to provide 4K/UHD content. AT&T has a DirecTV dedicated 4K channel including the MLB network with 4K baseball broadcasts, PGA tournaments, and UFC fights. The Olympics, Warner Brothers, BBC’s Planet Earth, Hulu and YouTube also offer UHD and HDR content.
Movies and TV shows display four times the resolution with UHD as compared to HD content5, and therefore, it has become the studios’ most valuable content requiring robust content protection.
Set-top-box makers provide 4K UHD set-top-boxes (although OTT content does not require a set-top-box to stream 4K content). While better hardware continues to be made available, the 4K UHD content is a major driver. For streaming media adapters, 4K video quality as an added feature is becoming the differentiator among streaming media adapter vendors. Most major vendors across both streaming media device adapters and players have launched 4K products.
How to Secure Premium UHD Content
Today, there are two choices for content protection: (1) legacy satellite and cable TV content protection systems based on conditional access or (2) digital rights management, which serves the internet-based over-the-top (OTT) market. Due to the valuable nature of UHD content, very high security requirements must be met. This is one area where digital rights management protection has an advantage over conditional access. There is a premium placed on 4K/UHD content, and therefore, having the security mechanisms moved from the hardware to the network level to be protected through secret keys and the return path of the IP channel is essential.
The high resolution and image quality of 4K/UHD television content is on par with high quality digital cinema. This means that 4K/UHD television files are very valuable property and have to be protected accordingly. MovieLabs, a research and development organization focusing on movie and television technologies, has published Enhanced Content Protection specification (https://movielabs.com/solutions-specifications/enhanced-content-protection-ecp/) to provide a guideline for 4K/UHD content protection requirements.
The MovieLabs 4K/UHD content protection specifications require video playback device makers to support:
A TEE (trusted execution environment) that must take care of content decryption, and handling of any cryptographic material e.g., device keys, content keys etc. as well as other security processes.
A SVP (secure video path) where the decrypted buffer is securely transmitted to the rendering element of the device e.g. display
Hardware descrambler
HDCP 2.2 or higher
Watermarking
The SoC (System on Chip) platforms that power modern digital devices are advancing their security features to support these requirements. Intertrust’s DRM solution, ExpressPlayTM, takes advantage of SoC implemented security features such as TEE and SVP. ExpressPlay also supports watermarking to offer the highest level of content protection for premium content distribution.
