Cornerstone Crumbs - What's with Roku?

"The Lord bless you and keep you;

The Lord make His face shine upon you,

And be gracious to you;

The Lord lift up His countenance upon you,

And give you peace."

Numbers 6: 24-26

Roku, Inc. (ROKU) is having a terrible day and increasingly horrific drop from its July peak near $480 - yes, Roku is down nearly 50% from this peak, and near 11% today alone. The culprit today? MoffettNathanson.

Moffett has come out arguing that Roku deserves a 4-5 times Revenue multiple, for 2025. Yes, that is right, for 2025, equating to a SP of around $220 in four years. For those not familiar with Moffett, the company describes itself as a “next generation” independent sell-side research boutique, that has been operating since 2013. Since its founding, Moffett considers itself as the "standard-bearer" for Media and Communications research. The firm has begun to expand beyond this original sector, recently adding Payments, Processors & IT Services to its research offerings.

"Next generation" and "standard-bearer" are quite the self-derived compliments when we view the list of companies covered, as well as buy recommendations which include:

  • Alphabet, Inc. (GOOG)

  • Frontier Communications (FYBR)

  • Discovery, Inc. (DSCA)

  • The Walt Disney Co. (DIS)

I don't see any coverage of The Trade Desk, Inc. (TTD), and Moffett's evaluation of Roku is quite absurd to say the least. For me, it is always a red flag when firms are heavily focused on legacy companies and Big Tech, as I view this as a conservative versus "next generation" approach. It's also a very common practice in using these companies as "competitive threats" to suppress newer more innovative competitors - taking market.

But what I'd really like to focus on today is the chart above. The market has pushed Roku down over 30% the past three months. The key winners out of this group have been Netflix, Inc. (NFLX) and Trade Desk, while Big Tech companies like Amazon, Inc. (AMZN) and Google have been modest gainers. Traditional and legacy businesses have been underperformers including At&t, Inc. (T) and Comcast Corporation (CMCSA). So Roku is at the bottom of the barrel with respect to all of these companies, all while outperforming them from a Revenue growth perspective, and for Netflix, also from a Cash Flow perspective.

In other words, the fastest growing streaming company in the U.S. is the worst performer when it comes to its peers. Most egregious is the market's acceptance to allow Roku to underperform legacy peers. I've said it before, Roku is being attacked on all fronts with respect to competition - this is a good thing as no other company in the world is as laser-focused on the mid- and long-term opportunity. This is also all part of being an aggressive-growth investor. Every company under management in the portfolio has been under pressure at some point during 2021. As time goes by though, Wallstreet can't keep top innovative leaders down.

The key to Roku's success will be ARPU. This has always been the key for advertising-based business models, most notably for Facebook, Inc. (FB). Companies like Roku and Roblox Corp. (RBLX) are challenging digital advertising markets across legacy and Big Tech, this doesn't sit well with Wallstreet firms as it places pressure on the future market dynamics. Wallstreet always responds in the same fashion, to defend today's market leaders for short-term performance over tomorrow's massive market takers.

I see a very similar mindset here as was the case with Affirm Holdings (AFRM), in not recognizing the competitive strength versus peers in the market. Many investment firms, Moffett included, are not capable of seeing and/or accepting the fact that there is a massive paradigm shift under way that cuts across pretty much every major sector. Looking at the companies Moffett is covering, it is clear that they are behind the curve and have added Fintech recently to try to catch up. Likely why they have a $600 PT on Coinbase Global (COIN), announced in April of 2021.

Big Corporations and Big Tech companies' lack of innovation is why they attempt to collude with Big Government to thwart competition, and/or continue to milk their slowing business for as long as they can. Wallstreet plays a direct role in supporting this. There are a lot of older analysts today, who simply do not have a good read on the future opportunities, while at the same time, do not have the appetite for risk-taking. There are a lot of manipulative elements to Wallstreet, but the simple fact remains, they are incapable of picking top investment winners over time, because they are an extension of legacy. This is clearly the case with Moffett.

Like always, I put my money where my mouth is, as I've accumulated on Roku today increasing the position by 20% at $247.38.

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