For Serious Investors, It's Time to Level-Up Roku Style

John Chapter 15 verse 10 states, "If you keep my commands, you will remain in my love, just as I have kept my Father's commands and remain in His love."

I tend to hear a lot from others that Christianity is mundane, boring, no fun, etc., but I beg to differ. The logic is that the Bible has too many rules, and creates hypocrisy. I counter that God's word is from love, as a parent loves and looks to protect and guide their children. It is to this point, that I will benefit the most if I remain in God's love, striving to keep His commands.

For investing the key word from this passage is remain. The volatility of markets, especially on a day-to-day basis can weigh. In fact, it can quite quickly turn a disciplined investor into a concerned and pressured mindset losing sight of key goals and objectives. Yes, to remain in God's love means dedication and repetition of reading and living out His word. The same principles can be applied to strengthen an investor's focus and commitment to remain in, or keep consistency with key principles.

I've been managing portfolios over the past decade and 2021 is shaping up to be the most volatile of them all, aside from the pandemic's impacts. Some could argue that we're still in the midst of the pandemic, but we've been beyond centralized control tactics since the summer of 2020. This volatility isn't anything new necessarily, but there are some very interesting dynamics at play. Namely, the selectiveness of targeted growth plays versus broader growth indices.

There's a lot of schizophrenia going on to this point. Interest rates have been a key culprit as the rotational banter has used the increasing interest rates mantra being an initial justification for lower growth play performance, especially during the correction/recession for certain companies to the mid-May low-point. But more recently, we've seen the exact opposite occur as the ten-year has plummeted 3-4% on days and intensifying selling for select growth plays has occurred concurrently. The real culprit in my opinion is the generational divide, that corresponds strongly with the legacy-based centralized mindset for Big Government, Big Tech, Big Corporate America, and Big Everything.

For investors and traders, and from a day-to-day ground-level perspective, it appears that Wallstreet is attempting to shake-out investors through volatility. This is a gut-reaction to the pressure that has taken storm for more recent trading tactics, be it Wallstreetbets, memes, yolo, or many others. It's my opinion that we are witnessing a highly extreme version of volatility as a result in 2021. To a degree, this makes sense, especially for weaker companies recently going public, or not necessarily meriting multiple expansion based on the fundamentals.

But it makes no sense for a company like Amazon, Inc. (AMZN) to be up double-digits and MercadoLibre, Inc. (MELI) to be down double-digits. There's a lot of noise surrounding many points and pieces of information. Apple, Inc. (AAPL) comes out with a Buy Now-Pay Later, BNPL announcement and companies like Affirm Holdings (AFRM) and PayPal Holdings (PYPL) get hit. There's far too many examples to highlight, but the idea is clear, that there are many select growth companies being targeted in a basket of more broadly perceived risky companies.

Most important to consider during this environment is to focus on where the level-up trajectory for underserving companies being punished lies. For a mid- or long-term investor, the level-up trajectory is important as a mitigation strategy against short-term volatility. The longer a SP remains in a depressed range, the better opportunity for accumulation and mid- and/or long-term gains. Warren Buffet has always been credited with statements to this, preferring accumulation opportunities remain in order to maximize longer term potential. In essence, the combat to an attempted shake-out is to hold ground, and wait for the inevitable wipe-out for short-term traders.

A good example I like to use for this is Roku, Inc. (ROKU). I first began investing in Roku in 2018, and it's been one of my biggest winners since that time. Roku was hit with tremendous volatility soon after it went public in 2017.

From September 2017 through April 2019, Roku traded in a volatile range from low-point below $20 per share to a peak at nearly $75 per share - a duration of 19 months. However, Roku experienced its first level-up in 2019 thereafter and was trading near $130 per share, and as high as $170 per share prior to COVID-19, a duration of 10 months.

After the COVID volatility, Roku had returned back to the first level-up area by September 2020. So including COVID, the first level-up duration lasted 17 months, with a very narrow opportunity in March 2020 dropping below the first level-up area. Since then, the company has witnessed its second level-up and has remained there for the previous 10 months or so with the SP peaking towards $490 per share.

So there's multiple takeaways here. First, Roku has experienced substantial volatility at each area from the baseline to the two level-ups. Roku dropped by 63% from its peak in 2018, fell by 41% from its first level-up peak (before COVID), and since the second level-up, also fell 41% from its peak this past February. Despite level-ups, volatility for growth plays will likely remain.

Second, fundamentally, Roku has gotten significantly stronger each year, especially with respect to Revenue performance and key metrics driving the top-line, and concurrent Operating/Free Cash Flow, OCF/FCF inflection. For growth plays with little to no credit risk based on capital structure, OCF/FCF inflection and growth performance is the key measure of return on investment and importantly, growth into valuation.

Lastly, most of the volatility to the downside has been generated by both competitive concerns as well as broader-based sell-offs. Ironically during 2018, 2019 and 2020, all of these combined dynamics have occurred from multiple angles, whether competitive from the likes of Comcast Corp. (CMCSA), Amazon, Apple, TCL agreements and other potential deals with Alphabet, Inc. (GOOG) and Samsung, etc., the list really goes on, and will continue to go on for Roku. At the same time, broad-based growth sell-offs have tended to impact as well.

And yet anyone who stomached all of this buying Roku in 2017 (a duration of four years now), is sitting on a 1,500% return or higher. I would think that this is the type of performance that many investors would desire. However, the short-term attacks and misinformation, and blatant manipulation are constantly looking to shake-out as many investors as possible. This is a key aspect of what is driving volatility in 2021 as Wallstreet has witnessed retail investors taking more aggressive short-term strategies, combined with higher retail investment interest in general.

It is to this illustration of Roku, that I see a very similar occurrence for many companies in the portfolio during 2021. Many of the companies in the portfolio have seen substantial volatility, and we've barely finished the first half of the year. I was cautiously optimistic that this would adjust for the remainder of the year, but the first couple of weeks in July have shown that it may not change at all, and the mid-May low-point could be revisited or even tested further.

So in order to manage these challenging times (I feel that today's volatility is much more difficult versus 5-10 years ago), the focus needs to be forcefully committed to the level-up mid- and long-term trajectories. Without having a target for this, investors run the risk of getting shaken-out by today's volatility. To achieve this, it requires a balance of recognizing fundamental performance and growth into valuation, as well as deterring the level of FUD as it relates to competitive threats. Roku is a testament as Apple's announcement of a streaming service hit the SP, and yet today, Apple is going to add a button to Roku's controller, and is strongly dependent on the Roku platform. Roku has won the past four years and is poised to continue winning.

Affirm has been Apple's more recent target and Wallstreet was quick to update opposing positions justifying their Price Targets, PTs. At the end of the day it's all mostly FUD, or posturing as the reality is an investor is going to need to determine Apple's true ability to compete based on human capital, as human capital is what really creates a "moat", the most misused term in the competitive discussion narrative. For Affirm, I would risk my investment stake with them over Apple any day based on that one measure. I don't have confidence that Apple's team for BNPL will be capable of beating Affirm. Their streaming team clearly was incapable of beating Roku.

The discussion on human capital is a very important one, but is an entirely different tangent as well, that needs a dedicated blog to divulge and engage the discussion. My financial models are focused explicitly on key financial targets over the mid-term creating a clear trajectory for strong growth-based companies to tell me whether or not holdings are meeting or exceeding expectations and fundamental targets. For those that succeed, it is only a matter of time before they level-up, and ultimately, wipe-out the short-term traders, regardless of the side of the fence they sit.

As we all know, markets can remain irrational in the short-term, but over the mid- and long-term, it's impossible for FUD, misinformation, manipulation, etc., to hold stronger performing companies back. As I continue to manage the portfolio in 2021, I now believe that this year will represent varying degrees of duration allowing for further accumulation of many holdings. This already occurred from March through mid-May, and has begun once again in July. As always, time will remain the great equalizer for the short versus long battle.

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