Roku share prices have been on a rocket ride this past couple of weeks, jumping $101 to more than $418 per share just since Jan. 4. What made the company suddenly worth almost a third more to the market in just 10 days? Just as importantly, what does it need to do to justify those stratospheric share prices for the long run?
Admittedly, the company has had a very strong past year: It just announced that it had topped 51 million U.S. households (leading the streaming hardware sector), and also set records for watch time by those households. which is a big deal for its Roku Channel collection of free, ad-supported TV content.
Roku also faced down two of the biggest media and tech companies in the world, AT&T and Comcast, over carrying their big-name subscription streaming services, HBO Now and Peacock. And it topped off the last couple of weeks with the “less than $100 million” acquisition of Quibi’s library of about 75 shows.
All that led to a string of analyst upgrades, beginning with Laura Martin’s declaration for Needham that Roku had “won the streaming wars.” She dramatically raised the company’s target price, to $400, which it broke by the end of the week.
The froth generated by retail investors who actually know, use and like Roku no doubt contributed to its continued leaping price. But how to keep it there?
Can and should Roku get into the original content business in a bigger way, taking on many of the world’s biggest tech and entertainment companies? Or might another strategy be in order?
Rich Greenfield of LightShed Partners had a suggestion, tucked into the 21 predictions for 2021 that he and his partners posted this week: take advantage of Roku’s huge new market capitalization to issue equity that can finance more original content.
As he pointed out, Roku makes most of its money from ad revenue wrapped around the content its partners (such as the newly cooperative HBO Max and Peacock) contribute to the Roku Channel’s tens of thousands of hours of free programming, plus marketing spends they make in various parts of its interface.
“We believe the opportunity now exists to supercharge The Roku Channel, its owned and operated AVOD service, by adding content,” the LightShed post says. “While Roku has repeatedly denied any interest in creating its own content, we suspect it is just a matter of time before it sees the value it can drive to The Roku Channel through exclusive original programming – no different than the path laid out by its predecessors including HBO, AMC, FX and even Netflix.”
But attention-getting content these days s expensive. Just look at the $19 billion Netflix reportedly spent in 2020 for its endless tsunami of shows (which are, notably, financed by billions in debt). Disney plans to spend $8 billion a year keeping up, and some analysts (including Greenfield) suggest that may not be enough. As he put it, “table stakes in original content is at least $500 million per year in spending.”
The way out of that particular conundrum: issue some equity, backed by that suddenly substantial market cap, now north of $53 billion.
“We believe investors would likely reward Roku for raising equity if the use of proceeds were to help differentiate Roku with exclusive content,” LightShed’s prognostication concludes.
Roku may not have a choice. Already, four of the Roku Channel’s closest analogs are Fox’s Tubi, ViacomCBS’ Pluto TV, and Comcast’s Xumo and the free tier of Peacock.
As the free, ad-supported services each continue to blossom in an economic slowdown and continued pandemic surge, their relatively new owners are getting more and more sophisticated about how they integrate content from their subscription and pay-TV outlets.
Look at the Star Trek, BET and MTV content on Pluto, for instance, or the huge viewership that Tubi says it gets from rebroadcasts of the hit Fox reality competition The Masked Singer.
Roku hasn’t had any of that kind of marquee content to call its own until, in a modest way, now, with the Quibi deal. Double Emmy winner #FreeRayshawn is a nice pickup, and many of the other shows in the library come from name-brand creators whose work was lost on a misbegotten mobile platform cursed by even worse timing.
So, time to crank up the equity offering, and start shopping. Everyone else is already at the store.