Streaming service Roku is going to IPO: what can go wrong

Image: Mike Mozart , CC BY 2.0

Streaming TV service Roku Inc. filed documents for the initial public offering on the stock exchange. The largest player in the US market expects valuation of $ 1 billion. However, the company also announced a number of risks, which, according to investors, may hinder a successful IPO.
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What is Roku

Roku is best known for its consoles, which allow you to stream Netflix and other streaming video. The company originated as a division of Netflix Inc., which invested $ 5.7 million in it . In 2009, Netflix sold its stake for $ 1.7 million. But Roku still works with this multimedia company and even rents office space from Netflix.

Roku released its first set-top box in 2007. At that time, there were practically no streaming devices with similar functionality (with the exception of Apple TV), and Roku quickly conquered the market. Today she is the leader in the United States in Internet TV gadgets.

Roku essentially sells three things: its streaming equipment that works with televisions, advertising and affiliate content. Roku stands for the last two items on this list as “platform revenue” - a segment that is growing, while hardware revenues appear to be declining.

Not without Roku and scandals. The company faced problems selling its devices in Mexico - hackers began broadcasting pirated content from HBO, ESPN, and others through Roku consoles. As a result, a Mexican court blocked the sale of the device throughout the country, which cost the company almost $ 2 million .

IPO

Rumors about Roku's IPO have been around for a long time - the company thought about it as early as 2014 , but chose to remain private. However, in 2017, Roku still revised its decision and hired underwriters. They are Morgan Stanley, Citigroup and Allen & Co. One of the reasons for the public offering of Roku shares this year may be a desire to reassure people who helped finance the company at an early stage.

It is also possible that the company's management was inspired by examples of two other technologically advanced IPOs - Snap Inc. and Blue Apron Holdings Inc. Snap Inc. placement It was a record in terms of volume, the company's shares on IPO traded at $ 17 per share, but on September 1, they dropped in price to $ 14.27. Meanwhile, Blue Apron’s value has fallen by 52% since its IPO.

What will happen to Roku is not yet clear. In the first six months of 2017, sales of the company's consoles decreased by 2% to $ 117.3 million compared to the same period last year. Although the company actually sells 37% more equipment, the IPO statement says it reduces average selling prices. On the other hand, revenues from the platform increased by 91% to $ 43.1 million over the same six-month period.

As for the details of the IPO, Roku decided to offer two classes of shares for investors . Class A common shares held by managers, directors and several early investors will equal one vote per share. Class B shares will be equal to 10 votes per share and will be converted into one share of class A ordinary shares.

This step allows insiders to maintain stronger control over the company after an IPO. Now 28.4% of the company's shares are owned by the company's CEO Anthony Wood, 35% by the venture company Menlo Ventures, 12.9% by the Fidelity Investments Inc. fund. and 7% - 21st Century Fox Inc.

What can go wrong

Roku is a leader in streaming television, which accounts for 27% of the US market. Nevertheless, experts do not see overly bright prospects for the company's IPO.

Roku's main business right now is selling devices. Recent placements of companies that specialize in selling products have not been very successful. For example, the GoPro stock price fell 38% last year and is trading 63% below the IPO price in 2014. Another player - Fitbit - has achieved even worse results: stocks fell by 61% in the last 12 months and by 71% compared with the initial price in 2015.

Roku probably expects the same fate - the product saturates the market, after which the company's revenue growth gradually fades away. Especially when you consider that Roku has strong competitors (consoles from Apple and Google) with larger budgets and more recognizable brands. Now the company has to literally fight for shelves in retail stores. The situation is aggravated by the fact that one of the largest online sellers of Roku, Amazon.com, also launched a competing product and will probably refuse to offer Roku devices on its website.

However, unlike Fitbit and GoPro, Roku has a chance to reassure investors of its prospects. In July, the company received 46% of its revenue from subscriptions and advertising on the platform. More importantly, sales in this segment grew by 95%, turning Roku into a software maker and content company.

When viewers watch CBS News and Vice, Roku earns advertising revenue. The company also receives revenue from subscription services such as HBO Now and Hulu. Some TV manufacturers pay for the introduction of the service Roku in their devices. At the upcoming roadshow, Roku will probably try to convince investors that the future of the company is in these areas of business.

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