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Stocks  | October 8, 2019

It’s been a brutal sell-off for hot tech stocks, which includes operators like Zoom Video Communications (NASDAQ:ZM) and Okta (NASDAQ:OKTA). But Roku (NYSE:ROK) stock has gotten hit particularly hard. During the past month, shares have gone from $170 to $106.

But this plunge in the ROKU stock price has been much more than just a general bear move. Rather, the company’s core business is suddenly in doubt.

Cable giant Comcast (NASDAQ:CMCSA) recently announced that it will give away its Xfinity Flex streaming media player – that is, for those who subscribe to its internet-only plans. Yes, this could take some sales away and dent the growth rate.

But there was something else that put pressure on ROKU stock: Apple’s (NASDAQ:AAPL) announcement that it will launch its own streaming service at a low price point of $4.99 a month. Oh, and this was followed by Facebook (NASDAQ:FB), which revealed its Portal TV device.

In light of all this, some Wall Street analysts have rung the alarm bells. One is Jeff Wlodarczak, who is with Pivotal Research. Consider that his price target is now at $60! According to his analysis, he believes that streaming devices will ultimately reach zero as other vendors follow Comcast’s move.

While all this was a lot to take in, I think things have actually been overblown. For the most part, I believe ROKU looks solid.

The Growth Engine Behind ROKU

First of all, the company is a growth machine – and there are few signs of a slowdown. During the latest quarter, revenues surged by 59% to $250 million. Moreover, the net loss was only 8 cents a share.

One key to this success is the company’s dominant market position, with about 39% of the U.S. market.  But there has also been a concerted effort to boost the user base, which increased 39% on a year-over-year basis to 30.5 million.

ROKU has been smart to aggressively transition its revenue base to advertising and subscriptions. For example, in the quarter, platform revenues spiked by 86% to $167.7 million. ROKU has also been bolstering its content offerings as well as expanding its distribution footprint, such as with an alliance with Walmart (NYSE:WMT). For the first half of this year, the Roku TV accounted for more than one in three smart TVs sold in the U.S.

No doubt, such factors will help fend off the competition. Besides, the market opportunity is enormous for ROKU.

“Streaming is far from saturated,” said the CEO of Conviva, Bill Demas in an email interview. “Not only is viewing seeing 2x growth year-over-year overall, but connected TVs have seen the largest gains, up 143%,” based on Conviva’s Q2 State of the Streaming TV Industry report. “New services and players have a challenge ahead in this increasingly crowded market, but Roku has a solid position as an easy, purpose-built solution especially as advertising gains additional ground in the streaming industry.”

Keep in mind that monetization is still in the nascent stages as well. According to the 2019 Consumer OTT Report – from Open X and The Harris Poll – less than 5% of the $70 billion spent on U.S. TV advertising is for OTT ads.

Bottom Line on ROKU Stock

The rising competition is certainly something to be concerned about. But it’s a factor that may not have much of an impact in the near term. It’s also important to note that ROKU has been effective in combating mega operators like (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) over the years.

So, all in all, with the recent fall-off in ROKU stock, I think there’s an opportunity here to get a top growth company that is riding the secular wave of streaming.

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