No. of Recommendations: 176
Phew! August turned out to be more complicated than anticipated. I knew I had several earnings reports to comb though, but just about everyone outside of AYX and ROKU posted results that I felt required a deeper look. Consequently, I spent a large chunk of time this month double checking my allocations against all the new info. One thing that has come through loud and clear this earnings season is this market has little patience for any softness in numbers. Several stocks in this neck of the woods – SQ, PS, EVBG, ZEN, TWOU, DOCU, NEWR – have been hit hard recently for anything even remotely resembling a slowdown in prospects. Only the cream seems to stay at the top.

In a broader sense it looks like the market is becoming much more selective with growth stocks. Being honest, that trade off seems only fair given the large premiums these stocks have received for most of 2019. My big takeaway is I not only need to be very discerning with my buys but also extra diligent in reconfirming my investing theses after each new piece of information. I know that seems intuitive enough, but the market has really hammered that point home in recent weeks.



2019 Results:


Month YTD vs S&P
Jan 21.0% 21.0% 13.1%
Feb 11.5% 34.9% 23.8%
Mar 7.9% 45.5% 32.4%
Apr 5.8% 54.0% 36.5%
May -0.4% 53.4% 43.6%
Jun 10.5% 69.4% 52.1%
Jul 6.9% 81.1% 62.2%
Aug 1.2% 83.3% 66.6%





August Portfolio and Results:



%Port %Port
31-Aug 31-Jul 1st Buy Return vs S&P
AYX 17.2% 14.2% 08/27/18 109.3% 106.1%
MDB 13.3% 12.7% 08/29/18 62.4% 60.8%
TTD 13.2% 14.4% 06/08/17 68.3% 64.2%
ROKU 10.8% 5.8% 05/13/19 66.9% 65.7%
ZS 9.6% 11.5% 08/27/18 43.9% 41.4%
OKTA 8.4% 9.6% 06/15/18 90.2% 85.9%
TWLO 6.9% 11.7% 08/27/18 45.9% 43.6%
SMAR 6.8% 7.0% 01/07/19 52.3% 43.4%
PLAN 5.3% 5.6% 05/28/19 23.7% 20.8%
CRWD 5.1% 4.3% 06/12/19 16.1% 15.2%
ESTC 3.5% 3.1% 07/15/19 -5.9% -3.9%
Cash 0.03% 0.04%
Return vs S&P
Month: 1.2% 3.0%
2019: 83.3% 66.6%





Past recaps for anyone who’s interested:

December, 2018: https://boards.fool.com/stocknovice39s-end-of-year-portfolio...
January: https://boards.fool.com/stocknovice39s-january-portfolio-rev...
February: https://boards.fool.com/stocknovice39s-february-portfolio-re...
March: https://boards.fool.com/stocknovice39s-march-portfolio-revie...
April: https://boards.fool.com/stocknovice39s-april-portfolio-revie...
May: https://boards.fool.com/stocknovice39s-may-portfolio-review-...
June: https://boards.fool.com/stocknovice39s-june-portfolio-review...
July: https://boards.fool.com/stocknovice39s-july-portfolio-review...



Stock Comments:

I remained at 11 stocks this month. There were no additions or subtractions to the names though I shuffled my allocations quite a bit. The nuts and bolts are below.


AYX – Alteryx continues to be a rock. The stock saw a nice bounce after 7/31 earnings, and I bumped it ~0.25% with my regular contribution for August. It’s continued to climb since. The company also took advantage of its recent momentum to issue $700-$800M in convertible notes this month. Though potential dilution is never ideal, I’m not overly concerned given the terms appear cheap. It’s also an easy way to ensure AYX has enough cash to maintain its growth initiatives if the broad economy should sputter. AYX remains #1 with a bullet in my portfolio, though I admit I’m starting to ponder my top end comfort level for an individual holding. That’s a nice problem to have I guess. For now I’m content to let my current shares ride but won’t add any more.


CRWD – I nibbled at CrowdStrike a couple times this month after trimming some TWLO. I know CRWD is expensive, but I find its numbers overwhelming. How many companies can tout a 103% Q1 growth rate in a year which should end up at $450M+ in revenue? (Besides ZM, of course!) That’s the type of rarified air we’re talking about here. I’m fairly optimistic CRWD can challenge triple-digit growth again next quarter and wouldn’t be entirely shocked if they ended up 90%+ for Q3. Even with the recent pullback, I’m willing to see how long they can keep this up.


ESTC – As we headed into 8/28 earnings, my July 15 swap of SHOP (+28.2% from 7/15-8/28) for ESTC (-15.4%) was definitely not a contender for my Move of the Year Award. Regardless, I felt Elastic deserved the chance to show me its results before making any decisions on whether to keep it. I’m glad I gave it the chance.

As stated when I bought ESTC, I recognized the growth but was keeping a close eye on margins and cash flow. I was also looking for further clarity on a business plan that seemed to be entering a lot of new areas all at once. I won’t rehash the results since it’s already been done (https://boards.fool.com/quick-elastic-estc-quarterly-results...), but they were good enough to keep me interested. I liked the fact both subscription and SaaS revenues accelerated and was pleased to hear their foray into monitoring and security seems to be gaining real traction. Their recent government win is intriguing as well (https://boards.fool.com/estc-huge-win-with-the-federal-gover...). More importantly, their call was very positive and their guide suggests revenues could accelerate as soon as next quarter. Elastic’s losses are still large enough to keep me from jumping in with both feet, but I believe this quarter gives the stock plenty of room to run. As a result I bumped my allocation a tick at market open the day after earnings.


EVBG – Everbridge is a prior holding I still follow, so I was tuned in to 8/5 earnings. Unfortunately, the numbers fell short. Revenue growth dropped from 40% to 35% and will more likely than not slip again next quarter given its recent trend. Raw customer growth held sequentially, but a decline in deferred revenue after four straight advances was cause for concern. Gross profit growth ticked down as well, and the company still hasn’t proven its path to consistent profits. To top it all off, I found their call both clumsy and evasive when prodded about the deferred revenue dip and their medium-term future.

While Everbridge continues to work toward expanding their corporate and healthcare segments, it still relies on government contracts for ~33% of its business (up from 30% last quarter). As I’ve mentioned in prior write-ups, next quarter is the US Government’s “spend it or lose it” quarter and most of EVBG’s potential European mass notification business won’t be finalized for another 10-15 months. Given the bureaucratic sales cycle, I’d expect things to drag out and look lumpy going forward. In addition, It didn’t help that the outgoing CEO stated last quarter to “keep your eyes peeled” for a 5-7% revenue bump through potential acquisitions, then followed it up with an $83M acquisition that is not immediately accretive and did nothing to significantly raise their FY guide. All in all, I’d say this report was a relative disappointment. The market seemed to agree, knocking it down 10%+ after hours on its way to slipping ~12% overall by the next day’s close. I find EVBG’s 2020 prospects interesting enough to keep it alive, but it moves to the outer edge of my radar.


MDB – Mongo’s been parsed to death. My main takeaway from everything I’ve encountered is that the need to collect, store and process unstructured data is only going to increase as time goes on. At this point me and my shares are just hangin’ out until September 4 earnings.


OKTA – Okta joined ESTC in reporting 8/28, and I thought their numbers were solid. Revenues came in about where I hoped at $140.5M and 48.5% growth. Subscriptions held steady and expenses got back in line as a percentage of revenues after a jump last quarter. Billings growth dipped from 53.4% to 42.4%, which did cause some concern. However, that was offset a bit by RPO growth jumping from 59% last quarter to 68%. On their call management noted lumpiness in billings and recommended considering both together as a gauge of future business. I’m generally not a fan of companies switching metric focus mid-stream – that was probably the main lesson from my NTNX experience – but when viewed that way things appear to be OK. This is something I’ll be paying close attention to though going forward.

The revenue beat meant both gross profit growth and gross margins ticked up a notch, which was nice to see. The bottom line also benefitted as net (-4%) and operating margins (-7%) continue to march closer to breakeven. Finally, Okta reiterated they expect to finish slightly FCF positive for the year. In the end it was a good quarter from a great company.

I guess the only real glitch was the softness in guide, which sent the shares down a few percent the next day. As mentioned previously (https://boards.fool.com/just-to-mull-a-bit-more-i-find-that-...), I never take guides at face value. However, I do use them to estimate a range for the next quarter based on the firm’s history of guides vs actuals. In this case OKTA forecasts $144M and 36% growth at the top end next quarter. I’d anticipate something more along the lines of $152-$155M and 44-47% growth. That wouldn’t be bad at all, but it does require a solid Q3 beat to get there. While I think Okta can do it and continue to hold a large allocation, I did trim some for more shares of ESTC since the same process with Elastic kicked out a projection for accelerating growth.


PLAN – Anaplan reported 8/27 before market open. The market apparently wasn’t crazy about the numbers, but I thought they were fine. Revenue growth held at 46% vs 47% last Q. Subscriptions accelerated to 48% and expenses were reasonable. Gross margins ticked up to 84.4% for subscriptions and an all-time high of 75% overall. Customer growth was solid. Billings growth dipped a bit, but Remaining Performance Obligation growth has climbed from 44% to 53% to 56% the last three quarters. Losses are narrowing as a percentage of revenue and PLAN finished FCF positive for the first time as a public company. Given their guide and history, I’m pegging growth in the 47-49% range next quarter. So basically steady as she goes with a chance to accelerate a bit. The stock has dipped slightly the last few days, but it seems more knee-jerk to me than any change in fundamentals. It could also be some simple profit taking in a stock that had already rocketed 50%+ in the three months leading into earnings. I view Anaplan’s thesis as still being intact and will continue to hold my shares.


ROKU – Roku reported on 8/7 and I thought they knocked it out of the park. Revenue growth accelerated to its highest level since their 2017 IPO. The last four quarters are now 38.9%, 46.5%, 51.3% and 59.5%. Even more impressive, growth in their higher margin platform revenues has trended the same way – 73.9%, 77.2%, 78.7% and 85.6%. GAAP margins remain slightly negative as they focus on growth, but Adjusted EBITDA has now been positive for 5 consecutive quarters. Roku now has 30.5 million active accounts (+38.6%) that collectively streamed 9.4 billion hours (+70.9%) last quarter. The company is clearly finding ways to monetize those hours as average revenue per user jumped $2.00 sequentially to $21.06. In addition, the company highlighted the following in their shareholder letter:

* Roku is the #1 streaming platform in the US by hours.
* Roku’s operating system powers 41 million devices and smart TV’s in the US. This is 36% greater than their closest competitor and is expected to grow.
* Roku owns 39% of the US streaming media player installed base as of 1Q19.
* Roku’s operating system powers more than 1-in-3 smart TV’s sold in the US during the first half of 2019.

In a nutshell, Roku appears to be delivering in spades. The company is out in front of a huge shift in the way viewers consume TV, and its rapid growth doesn’t look like it will slow any time soon. This recent thread contains a pretty good description of what’s going on: https://boards.fool.com/roku-thoughts-34281655.aspx?sort=who.... As for the stock, I was able to grab some at $105.50 immediately after earnings, then added a couple more lots over the next few days. At the time those buys put Roku just below my target allocation of 9-12%. It has now solidly appreciated into that range. I really like what Roku is doing and can’t see myself exiting any time soon. Given the numbers, I’m mildly surprised more here don’t own it and would be curious to hear why others have chosen to pass. What is it that’s keeping you away?


RUN – A quick sidebar even if it might not be in the true spirit of the board. I’m not a big options player and never have been. The few I’ve written over the years have never been more than a blip in my portfolio and the thought has been practically non-existent since moving to growth investing. In simplest terms I like my companies and would rather hold the shares. Besides, playing it straight is much easier to manage.

That being said, I veered off script and bought a slightly out-of-the-money call on RUN just before earnings. Sunrun is “the nation’s largest residential solar, storage and energy services company” for whatever that’s worth. Like much of the segment, the stock has been on a tear. Sector mates ENPH and SPWR both soared 30%+ after earnings. Likewise, SEDG popped ~25%. Most convincingly, Raybert – who previously identified the first two names and seems to have a good grasp on solar (https://boards.fool.com/solar-energy-34234911.aspx?sort=whol...) – revealed he had a hearty 13% of his portfolio in RUN (https://boards.fool.com/as-promised-34265197.aspx). I wasn’t familiar enough with the company to open a position, but liked the odds of a beat and decided a short-term bet was worth the calculated risk given the info at hand and Raybert’s excellent work. I’ve seen others do something similar after write-ups on companies like ARNA and AMRN. I simply chose to nibble at an option rather than shares given my limited cash on hand.

Unfortunately, it didn’t pan out. As options are sometimes inclined to do it whipsawed from down 40% to up 90% in just the 48 hours before earnings. I seriously thought about selling up ~80%, but exiting before earnings was against my whole thesis for buying in the first place. To my chagrin RUN’s results were pretty meh and the stock slid ~10% after hours. Oh well, I guess somebody in the sector had to disappoint. I ended up licking my wounds and selling first thing the next day at a ~50% loss – about a 0.2% portfolio hit – to put the cash back into play.

Even though this move didn’t pan out, a huge thanks to Raybert for supplying the info I used to piece it together. As usual, I never cease to be amazed by some of the crazy-good insights available on these boards. The chances options become a significant part of my future reside squarely between slim and none. However, I felt this opportunity was too intriguing to pass up without giving it a shot.

SUPER IMPORTANT DISCLAIMER: Please don’t try this if you don’t know what you’re doing. While I certainly could have doubled my money (or more), I could just as easily have lost 100%. That’s the way options work. For perspective, my maximum loss exposure from this trade was roughly equivalent to the effect of a $5 MDB price drop on my overall portfolio. So it was very appropriately sized for my risk tolerance. Unlike holding the stock though, the time factor of options can severely limit your ability to recoup losses when things don’t break your way. That’s why so many people here avoid options, myself included the overwhelming majority of the time.


SHOP – I sold Shopify last month after a tremendous run, but was impressed enough by their 8/1 earnings to make notes for future reference. SHOP held 48% revenue growth at a roughly $1.5B run rate, which I find remarkable. Their merchant solutions, which is the faster growing portion of their revenue base, grew 56% and is now ~58% of total revenues. All their other metrics stayed roughly in line with past performance, and gross profit growth even ticked up a notch to 50%.

Even more impressive, their conference call expressed palpable enthusiasm for the company’s prospects. They seem to be killing it internationally. They launched their service in 11 more languages and their apps are now available in 18 languages overall. They have expanded Payments to 13 countries in varying currencies. Their Shipping service is now used by more than 42% of eligible merchants overall, and their Capital branch saw a 36% bump in advances and loans to $93M. They clearly have a lot going on, but it’s also readily apparent SHOP has all kinds of avenues for continued growth.

Most interestingly, Shopify apparently has candidates beating down their doors to serve as initial partners in their recently launched fulfillment network. The money quote:

“Since announcing Shopify Fulfillment Network at our Unite Conference, we have received an incredible amount of interest that has exceeded our expectations. Thousands of merchants have expressed their desire to be a part of our early access program and dozens of partners are eager to join us in being a part of the solution…Given that the uptake and interest for Shopify Fulfillment Network has been much stronger than anticipated, our plan is to accelerate investing so we can move fast and execute on this opportunity for our merchants.”

If those fulfillment plans do indeed gain rapid traction, how many merchants currently locked into Amazon might be tempted to give Shopify a look? This link leads to an excellent article explaining that while Amazon’s middleman system is extremely effective, Shopify might be a better choice for merchants seeking direct interaction with their customers (https://stratechery.com/2019/shopify-and-the-power-of-platfo...). I never fully realized the stark difference in the underlying business models of AMZN and SHOP. All services being equal – including fulfillment, of course – there’s a real argument that merchants who don’t necessarily need Amazon’s built-in traffic might be better off with Shopify. SHOP has always been extremely customer-driven, and right now it seems the company can do little wrong with those customers.

In the big picture Shopify appears to be transforming itself into a one-stop shop for any business of any size quite literally anywhere in the world. I don’t know exactly what their potential TAM might be except to say it is almost certainly magnitudes bigger than most. It also appears SHOP is positioned to temporarily slow or possibly even halt the recent growth declines caused mostly by the law of large numbers (at least as long as the economy holds, which is no guarantee). So in essence you now have a company barreling toward a $2B run rate that should maintain something in the range of mid-40%’s growth for the next few quarters at least. That’s almost mind-boggling to me. SHOP’s market cap and already massive price appreciation this year have kept me from rebuying even as it continues to march upward. However, it stays high on my watch list and would definitely be a purchase candidate if it went on sale or I soured on something else in my portfolio.


SMAR – The main news this month was SmartSheet receiving a FedRAMP designation approving it for use by federal agencies and government contractors. That also means it will now be formally listed in the FedRAMP Marketplace. It’s always nice when one of our companies expands its market, but I’m much more focused on SMAR’s upcoming 9/4 earnings as a gauge of what’s really going on.


SQ – I was looking forward to 8/1 earnings, but decided to remain on the sidelines after seeing the results. Simply put, there was too much deceleration in too many areas for me to feel comfortable buying back in. For those interested though, there were a couple of really great threads breaking it all down. You can find them here: https://boards.fool.com/square-reports-2019-q2-earnings-3426... and here: https://boards.fool.com/is-anyone-but-me-purplexed-with-sq-3....


TTD – TTD reported 8/8. Some felt the report wasn’t great, but I found it plenty good enough. Revenues reaccelerated slightly from 41% to 42%. The company remains firmly profitable, with adjusted EBITDA (+57%) and non-GAAP EPS (+58%) accelerating both sequentially and YoY. Net and EBITDA margins continue to hold strong at 28.5% and 36.2%, respectively. Expenses rose a little faster than revenues, but as usual a nice chunk of change hit the bottom line even as TTD invests in its future. Overall, The Trade Desk remains one of those rare firms recording high growth and high profitability at the same time.

Like most call listeners though, I viewed the numbers as almost secondary. This report was always going to be about the specifics of the recent Amazon partnership and any updates on the foray into connected devices. CEO Jeff Green highlighted the usual suspects with CTV growing 2.5X, audio growing 270% and total mobile hitting a record 47% of gross spend. As expected, he was also bullish on the Amazon deal. The pleasant surprise for me was just how excited he sounded about where their Disney partnership might lead. I was really intrigued by his description of the potential benefits of programmatic ads during live events. Given the public tension between cable companies and sports networks (including Disney’s ESPN) over rights fees, this could create a whole new growth lever for TTD.

Outside of the typical sunshine and rainbows, it’s fair to note I thought Green’s distinct lack of China commentary was a bit odd considering his glowing review of their overall Asia progress. China was noticeably absent from the prepared remarks, and Green answered a question about it with a fairly stock “just staying the course”. I know TTD is playing the long game there (as they should), but I didn’t sense Green’s usual enthusiasm for the topic even if I didn’t know what exactly to make of that observation. It turns out TTD ended up formally announcing a General Manager for China on 8/20 (http://investors.thetradedesk.com/news-releases/news-release...). The position will be based in Shanghai and tasked with leading their business there. If the hire was still in the final stages at the time of earnings, that might explain why Green was so quiet about it on the call.

One of the past knocks on TTD has been whether Green’s cheerleader salesmanship of their future is more hype than reality. Along those lines, I’ll readily admit their outlook has a bit more uncertainty than some of my other holdings. TTD’s thesis has always required some leap of faith about the inevitability of content consumption moving to the connected world. I believe that leap is getting shorter and shorter every day. When I think about last quarter, TTD’s main avenues for growth were primarily CTV and secondarily China. As we exit this quarter those avenues appear to have expanded to CTV, Amazon and Disney with China appearing to be at least temporarily bumped down the pecking order. JPutter also noted a recent contract announcement partnering with a company named Bidstack for programmatic ads in the eSports and gaming arenas (https://boards.fool.com/ttd-and-bidstack-deal-34284089.aspx). I find these new developments very encouraging, and it’s important to remember this is all happening while the company is already churning out profits. In my opinion, TTD has increased its odds of posting dominant future returns. As a result I’ll continue to hold a very healthy position.


TWLO – It’s no secret I’ve been questioning the size of my Twilio allocation the last couple of months. This month I finally took action and pared it down considerably. My final steps to get there consisted of two parts. First, I dug into their 7/31 earnings:

* I’d say revenues were good but not great beyond the headline number. Organic growth dropped from something north of 60% to 56% while continuing to incorporate an acquisition that grew just 28%. My math puts the growth of the combined company somewhere around 50%, which seems to match up with what some others have calculated.

* Gross margins did tick up, but that number was inflated slightly by the Verizon A2P fee delay and will still be pressured when those fees eventually hit.

* Non-GAAP expenses as a percentage of revenues increased for the second quarter in a row, which isn’t much of a surprise given the costs incurred when folding in an acquisition. It still counts though.

* Their expansion rate drifted slightly down. While it’s still a phenomenal 140%, it’s important to note that rate doesn’t include any SendGrid business at all until 1Q20. I’m unsure exactly how they will handle the combined number at that point, but I’d have to think it’s going to be considerably less once everything is accounted for.

* Finally, they didn’t do much from the beat-and-raise standpoint that’s become almost a foregone conclusion for highly priced companies in this market. They did bump adjusted revenue $8M but kept base revenue the same. Granted, the raise would have been slightly larger if Twilio hadn’t backed out ~$8-$9M in anticipated revenues from the Verizon fee bump. It’s also fair to acknowledge those revenues should be reinserted and help lift a future guide once there is more clarity on the timing (next quarter, perhaps?). Regardless, that number is relatively small potatoes at a run rate over $1B.

* If asked to describe myself as being pleased, neutral or disappointed at the end of step 1, I’d have to say disappointed.

My second step was to review their call not once but twice. This probably had a bigger influence on my decision. I like it when companies reference new initiatives with comments implying they are seeing immediate traction, things are moving quickly and/or progress is going even better than expected (see SHOP’s fulfillment comments above). My Spidey senses start tingling when the emphasis is more along these lines:

* “we’re on the right path”
* “having those conversations”
* “lot of discussion”
* “we’re definitely having conversations”
* “we’re more having conversations at this point”
* and finally, the dreaded “longer sales cycle”

Twilio management used each of those phrases regarding their stated focus of “expanding Flex’s presence in the market as well as cross-selling Twilio SendGrid”. The longer sales cycle comment was tied at different points on the call to Flex as well as their overall progress with enterprise clients. In fairness, they did trumpet some lands with “early adopters” and “early disruptive” type companies. While that might support the idea their products are cutting edge, early adopters by nature still reside on the slower part of the adoption curve (http://weblog.tetradian.com/2016/08/09/tech-adoption-tech-ev...).

In addition, most here are fully aware of the crossing the chasm concept (https://ewthoff.home.xs4all.nl/Weppage%20documents/Summary%2...). In both of the above links you’ll notice that chasm resides right after “early adopters” and just before “early majority”, which is the point at which business momentum really takes off. Trying my best to read between the lines, it appears to me Twilio might have some work ahead to maintain rapid growth.

Don’t get me wrong. Nothing detailed above means the SendGrid acquisition and/or Flex won’t be smashing successes. It merely suggests Twilio and Jeff Lawson might be mortal. The law of large numbers applies to almost everyone, and the $1B revenue mark is a pretty good spot to check for signs of this effect. As it stands now I view Twilio’s present as more consolidation than hyper growth. Most of their low-hanging fruit has been plucked and they are transitioning to their next phase. To their credit they have clearly lined themselves up for expansion into email, Flex, 5G, smart cities and whatever else IoT might bring. In addition, their developer driven model almost certainly means a slew of yet-to-be-determined use cases are headed their way. All Twillo has to do now is prove they can turn all of that theoretical positioning and synergy into practical bottom line results. You know, the chasm and all.

After finishing this dive I decided Twilio’s August 6-7 SIGNAL conference was their last best chance to persuade me all is well (https://www.youtube.com/watch?v=zDAmPIq29ro). Even Lawson himself hinted at some exciting announcements. I did find some of those announcements pretty cool – particularly the Conversations API – but in the end it wasn’t enough to overcome my nagging concerns that Twilio’s immediate future might be tougher than originally planned. So while I’m still drinking the Kool-Aid, I’ve opted to sip from a glass for a while rather than keep guzzling from a gallon jug. Cheers!


ZS – ZScaler’s main August action was a quick 10%+ drop caused by a mid-month analyst report about possible sales challenges in their partner channel. I joined some others in viewing this as a buying opportunity and swapped some TWLO for ZS at that time. ZScaler has the chance to prove whether that was a wise choice or not when it reports on 9/10.



My current watch list in rough order is SHOP, ZM, GH (new), COUP, PAYC, PD and TEAM. Square, Zendesk and Everbridge find themselves in the penalty box after their earnings hinted at slowing momentum. PS rounded out my July list, but its prospects have since tragically perished in a horrific post-earnings dumpster fire. I can’t help but notice this list seems to be shrinking, which seems to mesh with my selectivity comments at the beginning of this recap.



And there you have it. August was a little erratic, but in the end I squeaked out another positive month. Or more accurately, my only three gainers – ROKU (+46.5%!!!), AYX (21.2%) and MDB (6.3%) – stepped up big time and literally dragged the rest of my portfolio into the black. I know macro issues continue to swirl, leading to more fear than greed in the current market (https://money.cnn.com/data/fear-and-greed/?iid=EL). However, there’s nothing I can do about that. I’m choosing instead to grind it out by putting my money in the best companies I can find and then paying as much attention as I can. I’m glad I’ve found a group that not only holds a similar view but continues to support each other with top notch ideas and observations along the way.

Thanks for reading and I hope everyone has a great September.
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No. of Recommendations: 16
Hi stocknovice!

Wow, great stuff thanks as always for articulating your thoughts so well.

P.S.,

I am pretty sure you are due for a promotion to "StockVeteran".


Best,
Matt
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No. of Recommendations: 21
Hi Stocknovice,

Excellent, excellent write up. I really like how you leave your emotions out of it and give your opinions.

So you asked why everyone isn't in Roku. Here are my thoughts. I think Roku is a flash in the pan much like Fit Bit. They really do not have a moat but are more of a commodity. Anyone can switch between them and any other provider like, Nvdia shield, Amazon Fire devices, Xbox one, Asus chrome box, Raspberry pi, minix neo, etc. While I realize that Roku is being put on tv's and also has a great price on their device, many of their competitors have cheap prices also.

Now if you look at the xbox 1 it has support for 4k also and many of the younger people that play games and also cut the cord will look closely at this for their streaming, but if they wanted something smaller I do not think they would pick the Roku. The big strike, in my mind, against Roku is you can't put kodi on it. Most of the cord cutters want to be able to put the kodi os on their device. Devices like Amazon can be jail broke to put kodi on them and other devices like pi and xbox one can load kodi directly on them. You can't jail break or put kodi directly on the Roku, the only way to show kodi through the roku is to mirror it. This is unacceptable because of the many steps and awkward control while watching kodi.

So while roku is putting up some great numbers right now, the one number that I do not like is it's gross margins. They are sitting at 47% which is probably about average for a company that is building and selling devices but is not impressive. I am thinking that their growth is going to come to a slow halt and growing in the single digits, something like fit. I have seen this play out before with companies like Amba and Garmin.

So that is what is keeping me out of Roku. I am glad you are doing well and I hope it continues for you but keep a sharp eye on it.

Andy
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No. of Recommendations: 13
As long as Roku is coming pre-installed on televisions, it does not matter what else is out there. Now fully 1/3 of all smart TVs sold have Roku as the operating system. Up from 1/5 from a couple years ago.

Roku's device sales have actually been very lackluster. That's not where their growth is comping from. This is not a "device" company like Fitbit. It's an operating system company that monetizes it with free ad supported content.

I don't know ambarella but this is not Garmin either. Garmin got disrupted by another device, the cell phone.

There are many articles explaining where Roku is headed, here is one. "Devices" are not part of their long term strategy.

https://www.google.com/amp/s/www.theverge.com/platform/amp/2...
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As long as Roku is coming pre-installed on televisions, it does not matter what else is out there. Now fully 1/3 of all smart TVs sold have Roku as the operating system. Up from 1/5 from a couple years ago.

I am glad you pointed that out 12x, I forgot to mention. Roku is also a walled garden, which is another strike I see for them. They are trying to create their own add supported system. I have 3 smart tv's and do not use any of the apps or roku that came with them. I went out and bought a firetv and xbox 1 that allow me to load any app I want onto them.

I have never tried Roku so I can't say anything about their system.

Andy
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No. of Recommendations: 3
So what retailers are going to sell FireTV? A product of their competitor? FireTV is trying to do the exact same thing, create a walled garden, that's not an issue is it? At the end of the day Roku is just getting a channel to have an advertising outlet. One of Rokus advantages is they are 100% neutral.

Years ago when I thought the idea of buying books online was bad because you could not browse through it to see if it was good first and passed on a stock called Amazon, I learned not to disregard results because of my opinion. And Roku is getting results. Just look at the chart showing market share in this report.

https://ir.roku.com/static-files/df3d060c-0975-4903-83d3-0e1...


Of course there are people who would rather buy a FireTV or whatever else. They make the minority according to the chart. That upward sloping line showing Roku is in the lead and growing the lead is what matters. Not personal preference.


I'm obviously not here to change minds or convince people to buy Roku but that's the way I see it. Much has been said about Roku already. But let's not look at the wrong thing and consider them another Fitbit or GoPro or whatever when their future lies in operating system/platform. That has several demographic trends working in their favor.
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No. of Recommendations: 1
Let me just say my thesis for holding Roku is it being the default OS preinstalled in various television brands. The other line going up strong on that chart is Tizen which is a Samsung brand operating system. I do not see Roku having a large presence in Samsung. Samsung owns roughly 33% of the smart TV market. LG and Visio are also large. Will have to see if it makes sense to expect Roku to continue to garner TV OS market share. That has been a driver for growth recently. Because if not it then falls back on them selling more devices. Samsung and Roku alone make up a big part of the market already.
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We are just having a good conversation about Roku 12x. I don't have a dog in this hunt and maybe you will change my mind

I'm obviously not here to change minds or convince people to buy Roku but that's the way I see it. Much has been said about Roku already. But let's not look at the wrong thing and consider them another Fitbit or GoPro or whatever when their future lies in operating system/platform. That has several demographic trends working in their favor.

Now that you brought up GoPro, isn't what they did exactly what Roku is trying to do. The only difference is that Gopro had their own content. They were trying to be a content provider which would have allowed them to monetize it. What does Roku have that is different or a moat? It isn't their OS because their are many OS's and people do not care about that. Describe to me their moat.

So what retailers are going to sell FireTV? A product of their competitor? FireTV is trying to do the exact same thing, create a walled garden, that's not an issue is it? At the end of the day Roku is just getting a channel to have an advertising outlet. One of Rokus advantages is they are 100% neutral.

Actually Amazon is breaking down walled gardens. This was posted on this board awhile ago when TTD was teaming with Amazon. TTD, as you know, works with anybody and everybody except walled gardens.

https://www.fool.com/investing/2019/08/13/heres-why-the-trad...

One of Rokus advantages is they are 100% neutral.

Except for ads, they are just neutral in giving out other people's content, except for Kodi. But maybe that is why they won't let Kodi on their box, because that is another free OS. I would say they are trying to be another netflix right?

Andy
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Let me just say my thesis for holding Roku is it being the default OS preinstalled in various television brands.

Ok thanks 12x.

Andy
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No. of Recommendations: 52
Wow. Go away for half a day and a great discussion on Roku breaks out. I also received a reply off board with someone’s reasoning for giving it a pass, so greatly appreciated. I’m clearly biased since I own the stock, but I’d like to add some thoughts to those already made. This isn’t meant to convince anyone to buy, hold or sell the stock. It’s only meant to clarify my thesis within the context of the current conversation.



First, I had a couple comments on the business plan as I view it.


Andy: What does Roku have that is different or a moat? It isn't their OS because their are many OS's and people do not care about that.

In a weird way the fact people don’t care might actually be somewhat of a moat. Other than the really small subset you reference that prefer Kodi, most consumers are indeed indifferent about their smart-TV OS. That indifference means those consumers who aren’t seeking out a specific OS have a 1-in-3 chance of buying a smart TV with Roku as the potential default for accessing their content. So the moat might not be the consumer, but rather the existing deals with manufacturers who have already committed to putting Roku’s OS in their product. This is where Roku’s neutrality helps them. What smart-TV manufacturer that doesn’t have its own OS would willingly want to install Samsung’s or Amazon’s when those companies are clearly direct competitors? In my opinion that gives Roku a definite edge. Someone is going to get the consumer’s money. Roku is putting itself in position to facilitate a boatload of those transactions.

Andy: I would say they are trying to be another netflix right?

I think that’s an interesting comp and it does makes some sense to me (others may chime in if they disagree). The difference I see is Roku isn’t stubbornly digging its heels in against an ad-supported free offering like Netflix. Roku is instead embracing that concept with the intent of monetizing their users however they can with no real preference whether it’s through subscriptions or ads.



Next, I had some observations on their numbers.


Andy: So while roku is putting up some great numbers right now, the one number that I do not like is it's gross margins. They are sitting at 47% which is probably about average for a company that is building and selling devices but is not impressive.

12x: Roku's device sales have actually been very lackluster. That's not where their growth is comping from. This is not a "device" company like Fitbit. It's an operating system company that monetizes it with free ad supported content.

I agree with 12x’s statement, and that’s a big part of my thesis for owning the company. As Andy points out, overall gross margins are pretty pedestrian. However, I view Roku more through the individual breakouts they provide. Their own stated strategy is “trading player margin for account growth and platform revenue growth". So how are they doing?



First, let’s take a look at the big picture through overall revenues and gross margin:



Net Revenue % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 $100.09 $99.63 $124.78 $188.26 $512.76 2017
2018 $136.58 $156.81 $173.38 $275.74 $742.51 2018 36.4% 57.4% 38.9% 46.5% 44.8%
2019 $206.66 $250.10 2019 51.3% 59.5%

Gross Margin
Q1 Q2 Q3 Q4 YR
2017 38.8% 37.8% 40.0% 39.0% 39.0%
2018 46.2% 49.6% 45.6% 40.7% 44.7%
2019 48.8% 45.7%


My Take: Accelerating revenues. Nice! To Andy’s point, overall gross margins make me a little less enthusiastic. So let’s dig deeper.



How about player margin?


Player Revenue % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 $63.68 $53.65 $67.25 $102.82 $287.41 2017
2018 $61.50 $66.47 $73.33 $124.34 $325.64 2018 -3.4% 23.9% 9.0% 20.9% 13.3%
2019 $72.51 $82.42 2019 17.9% 24.0%

Player Margin
Q1 Q2 Q3 Q4 YR
2017 16.9% 6.4% 7.9% 9.5% 10.2%
2018 15.8% 22.2% 11.5% 2.4% 11.0%
2019 9.8% 5.5%


My Take: Yuck. Player margin stinks! They’d better be trading it for something else or they are probably on the road to bankruptcy.



How about account growth?


Active Accounts (millions) % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 14.2 15.1 16.7 19.3 2017
2018 20.8 22.0 23.8 27.1 2018 46.5% 45.7% 42.5% 40.4%
2019 29.1 30.5 2019 39.9% 38.6%

Streaming Hours (billions) % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 3.3 3.5 3.8 4.3 14.9 2017
2018 5.1 5.5 6.2 7.3 24.1 2018 54.5% 57.1% 63.2% 69.8% 61.7%
2019 8.9 9.4 2019 74.5% 70.9%


My Take: Now we are getting somewhere. Roku has 30.5 million users streaming 9.4 billion hours. Roku is not only gaining millions of eyeballs each quarter but also seeing the time those eyeballs spend glued to their platform skyrocket. That’s a lot of opportunities to monetize their platform.



And finally, platform revenue growth:


Platform Revenue % YoY
Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR
2017 $36.42 $45.98 $57.53 $85.44 $225.36 2017
2018 $75.08 $90.34 $100.05 $151.40 $416.86 2018 106.2% 96.5% 73.9% 77.2% 85.0%
2019 $134.15 $167.68 2019 78.7% 85.6%

Gross Margin
Q1 Q2 Q3 Q4 YR
2017 77.1% 74.4% 77.3% 74.6% 75.7%
2018 71.1% 69.8% 70.5% 72.2% 71.1%
2019 69.9% 65.4%


My Take: In my opinion this is where the real profit potential lies. Platform revenue growth is accelerating at VERY impressive rates, and gross margins are clearly MUCH higher in this area. What makes this development even more intriguing (to me anyway) is this:


Platform Rev % Total
Q1 Q2 Q3 Q4 YR
2017 36.4% 46.1% 46.1% 45.4% 43.9%
2018 55.0% 57.6% 57.7% 54.9% 56.1%
2019 64.9% 67.0%



As you can see, those higher margin platform revenues are rapidly becoming an ever bigger piece of Roku’s total pie. The company does indeed sell some hardware but only as a means to get more viewers on its platform. It’s the ads and extras Roku offers once those viewers are there that lead to the real money. I interpret Roku’s numbers as showing they are not only sticking to their stated strategy but executing it perfectly. I have no reason to think their business momentum won’t continue at least through the second half of the year, especially when you consider the potential accounts and hours they could add via people upgrading TV’s over the holidays. I can’t speak for everyone that holds Roku, but I consider the next two or three quarters must-see TV (very crappy pun totally intended). I guess that’s what makes a market.




12x: I'm obviously not here to change minds or convince people to buy Roku but that's the way I see it.

Andy: I don't have a dog in this hunt and maybe you will change my mind

To me this exchange exemplifies why this board is so great. I’m never looking to change anyone’s mind in these discussions. I’m only looking to refine my own thesis through the viewpoint of others. Everyone here is 100% free to make their own decisions on what to do with their money. There’s really nothing to “win” on an internet message board. Unfortunately, not everyone feels that way and it can often pollute the discourse to the point the entire board suffers. In my opinion that’s part of what splintered NPI and I believe the entire Fool community is worse because of it.

In its purest sense Roku is only a dog in my hunt while I choose to own it. That’s the only connection I have to the company. I’m not here to stump for technologies, gardens or brands. I’m only here to find stocks I think can maximize my returns until a better option comes along. I don’t own a Roku device or TV and don’t plan on it. I’m simply choosing to own a part of what I believe is a successful business at this point in time. It’s discussions like these that help guide my decisions and I appreciate the thoughtful yet civil way we continue to break these things down.



Andy: … keep a sharp eye on it.

Very sage advice, my friend. I promise I will.
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No. of Recommendations: 6
I'd love to see a breakdown of where ROKU's revenue comes from. Users don't pay...except for their premium content, which has to be minuscule. Not sure why content providers like Netflix or HBO would pay...Roku benefits from having their products available as much or more than they do. Who's paying Roku all these hundreds of millions of dollars a year? Advertisers? To show a little add on the home screen before the user clicks on Netflix or HBO's app? How much can they charge for that?

I just don't understand how they make money. Or what exactly they're selling. That's why I haven't been able to buy ROKU.

Bear
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No. of Recommendations: 6
I'd love to see a breakdown of where ROKU's revenue comes from. -- Bear

When I want company details..... I go to the company:

https://ir.roku.com/static-files/df3d060c-0975-4903-83d3-0e1...

Both platform and player segments exceeded our expectations resulting in an exceptional quarter. Total revenue growth accelerated to 59% YoY, primarily driven by growth in advertising as Roku monetized video ad impressions once again more than doubled YoY. Increases in the estimated value of content distribution agreements, based on improved visibility and performance trends, also resulted in a larger than expected recognition of revenue in the quarter. As a reminder, revenue recognition for our content distribution agreements can be lumpy quarter-to-quarter.

<snip>

The most successful digital ad platforms are built on three ingredients: a coveted audience, reach at scale, and proprietary data to drive results for marketers. Roku possesses all three. This quarter, we’re highlighting how data is scaling and differentiating our platform business.

There is more at the link where they explain this stuff.

Rob
Rule Breaker / Market Pass / Supernova Navigator Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.
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Who's paying Roku all these hundreds of millions of dollars a year? Advertisers? To show a little add on the home screen before the user clicks on Netflix or HBO's app? How much can they charge for that?


Bear, Roku has the "Roku Channel" that you can watch movies for free. This is all older content, but its free. Roku will show advertisements on these channels, and that is how they are generating income from their platform.
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Rob,

Thanks for the post and the link to the information.

I have posted a few times over the past few weeks on the topic of Roku and what will be its role and advantages in the Ad Exchange as CTV programmatic advertising continues to grow exponentially over the next 5 years. Therefore, I will not bore anyone with continued discussion on that topic.

However, I will say that having read the information provided by Rob's link, a form of the words "ad" or "advertising" appears no fewer than 20 times in the first 4 pages of the report. Keep in mind that this count does not include the numerous uses of the word "marketing".

That is where Roku will be as the years tick by and cord-cutters and never-corders continue to grow.

On a topic related to words in the referenced report...the most important word only appeared once...INTERNATIONAL.
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No. of Recommendations: 2
Bear, Roku has the "Roku Channel" that you can watch movies for free. This is all older content, but its free. Roku will show advertisements on these channels, and that is how they are generating income from their platform.

That’s a great example of something I’d like to know. How many users watch the “Roku Channel?” And how much of their platform revenue comes from ads on this channel?

Bear
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No. of Recommendations: 9
To give you a precise answer as to where they are getting the ads to sell here’s the source.

https://digiday.com/media/inside-race-scramble-ad-supported-...

In deals with TV networks and other publishers that distribute their apps on Roku and Amazon, both platforms take 30% of the ad inventory available on those apps.

A publisher if they want someone to view their content (so they themselves can sell ads) they must get their app on a platform for it to be viewed. In order for Roku to allow the app/channel onto Roku the price is to give them 30% of the ad inventory for Roku to market and sell via their own machinations.

Same for Amazon and FireTV.

So if Discovery Channel App has a thirty minute show that has 10 ad impressions in total, 3 will be Roku’s.

30% of ads across expanding number of apps and channels x ballooning streaming hours (+72%) = accelerating hyper growth.

Darth
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No. of Recommendations: 6
Expanding on what I was saying since Roku Channel was brought up. The movies on their are owned by a publisher say 20th Century Fox.

Big hasn’t made Fox a lot of money lately. Let’s dust it off and put it on the Roku channel and their 30 million+ sets of eyeballs and set it up to have 3 breaks of 5 ads. Every time Big streams Fox sells 10 ads and Roku sells 5. And so on and so forth for all the ad supported content. There’s apps and channels and movies and shows. And shows and movies in apps.

I believe there’s other complexities and deals and ad selling services (like programmatic data) that a Roku provides to add to the mix as well. But Ads are what make up the bulk of platform revenue.

Darth
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No. of Recommendations: 17
I first bought a stake in ROKU in late 2017 primarily because i believed in the future potential of superb Founder/CEO Anthony Wood and added heavily in the December, 2018 decline as data became more clear and as my understanding increased.

Wood has proven his visionary and executive brilliance and has been telling us all along that the ROKU device is primarily a loss leader to enable the leap into a broad range of more lucrative services associated with the move to CTV.

ROKU provides an OS system for content providers, a superior system for adtech targeting while maintaining consumer privacy (unlike Amazon, Facebook, Google), and sign up support for new customers for all content providers.

Here is a quote from Wood 13 months ago trying to o tell the market it is missing the point in thinking of ROKU as hardware:

“We don’t really make money... we certainly don’t make enough money to support our engineering organization and our operations and the cost of money to run the Roku service.....That’s not paid for by the hardware. That’s paid for by our ad and content business.....We help content distributors find customers, sign up customers, and promote their content, and we get paid for that.”

This is from the most recent Q call:

"Our ad business is thriving as we offer a superior solution providing precision targeting, access to premium inventory, unique sponsorships, and OTT reach that an individual publisher of third-party ad tech provider cannot match. The Roku OS was built to create value for advertisers and content distributors."

I do wonder if Amazon's latest move with TTD is an effort to compete with ROKU's privacy advantage. I don't buy the pitch that AMZN's primary purpose is a magnanimous move to help out the little guys and weaken anti competitive arguments.

Of course it is comforting to see the continuing ROKU skepticism. I continue to be very long but not without growing concern over valuation. Longer term investors own stocks when we think the future is better than the current consensus.

Results of the last 2 quarters has made it fairly clear that the existential case against ROKU is dead. Rather, ROKU now seems destined to have an important and secure place in the future of the huge and rapidly growing CTV service opportunities. How dominant a place and how much is already priced in the stock is still unclear. I remain pretty comfortable risking a sizeable stake on Anthony Wood's ambition and ability to stay in front.
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No. of Recommendations: 1
Bought Roku at $40 in January and sold at $150. I'll be back in but it's ran too much to fast for me. The last quarter was killer and you all that aren't owning it because you're looking at it as a hardware play and tracking overall 47% margins.

That's the old roku. Instead track it as an add platform play. Those margins are at 86% and all you should be tracking.
Hope it drops to the 120’s so I can load up again.

How has owning TTD during that time worked? Not nearly as good. I'll be in TTD before next earnings but don't see much of a need to try my luck with them until about that time. But there's room for both to kill it in this market.
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Bear,

My best guess -- tons of ad revenue from YouTube. People get Roku for the all-in-one platform. Anything they watch on YouTube has ads. Those ads add up (see what I did there :)).

Just a guess, but I think it's much bigger than what Roku channel brings in,

Brian

Long ROKU (very small position)
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My best guess -- tons of ad revenue from YouTube. People get Roku for the all-in-one platform. Anything they watch on YouTube has ads.

Brian, why would YouTube let Roku have any of that ad revenue? YouTube doesn't (I wouldn't think) care if people watch their ads on Roku, their phone, their computer, their iPad, another device connected to a TV, etc. It seems crazy to think they'd give anything to Roku, doesn't it?

Bear
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Roku could block YouTube ads or replace them with their own. Adblockers are developed and used for free. It’s probably easier to compromise and pay a small fee to those who watch on Roku than continue to change code or not work with the platform.
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Brian, why would YouTube let Roku have any of that ad revenue? YouTube doesn't (I wouldn't think) care if people watch their ads on Roku, their phone, their computer, their iPad, another device connected to a TV, etc. It seems crazy to think they'd give anything to Roku, doesn't it?

Bear, pretty sure this has to do w the great distribution Roku has ---- 30.5M active accounts and 9.4Bn streaming hours. The content on the home screen of roku includes Netflix, Amazon, HBO, Pandora, CBS News, etc., YouTube has to be a part of that or potentially risk losing mindshare.
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Brian, why would YouTube let Roku have any of that ad revenue

Respectfully that should be obvious. Billions of ad impressions. What else are you going to watch you tube on. A phone? To stream it on the TV you make a deal with ROKU and Amazon, etc.

Darth
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No. of Recommendations: 45
I JUST DON'T UNDERSTAND HOW THEY MAKE MONEY
_______________

Feel free to challenge or add to the list below:

1. Hardware: Roku makes money on the sale of the Roku device.

2. Hardware: Roku makes money on the sale of Roku enabled CTVs.

3. Hardware: Roku makes money on via deals Roku cuts with TV manufacturers (Sharp, Hitachi, et.) to use Roku software on their TVs.

4. Subscription: The Roku Channel as a commission based subscription hub for other subscription services. Users can subscribe to multiple channels through Roku and pay just one bill via Roku.

5. Promotion: Roku makes money when premium subscription services pay to have dedicated buttons on the Roku remote.

6. Promotion: Roku makes money when premium subscription services pay so that they show up on the homepage when users start up the Roku device.

7. Promotion: Roku is paid commissions from subscription services that Roku recommends which channels a user should download when setting up their Roku device.

8. Advertising: Roku makes money when Roku sells the ad inventory it gets from all ad-supported publishers (including YouTube). Roku gets ad inventory from publishers in lieu of taking a cut of each publisher run add because Roku feels that it is too hard to track and monitor. Roku prefers to just take ad inventory in exchange for the extended audience reach Roku provides.

9. Advertising: Roku makes money on when selling Roku's own add inventory on Roku's own channel; The Roku Channel.

10. Advertising: Roku makes money when Roku strikes deals with publishers to sell their unsold ad inventory.

11. Advertising: Roku makes money using the new Roku Audience Marketplace (i.e. programmatic advertising data, first party data and ad-technology), by assisting publishers in selling their ad inventory to their targeted audience.

12. Advertising: Roku makes money by selling ad inventory on behalf of the smaller publishers that may not have the internal corporate infrastructure to do so on their own behalf.
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What else are you going to watch you tube on. A phone? To stream it on the TV you make a deal with ROKU and Amazon, etc.

Darth


With a smart TV you don't need either Roku or an Amazon Firestick to stream Youtube or anything else from the internet. I think Roku makes it easier, but that doesn't seem like much of a moat to me.

Jeb
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Hmc!

That pretty much answers that question.

Thanks for the thorough summary.

It's an encouraging indicator that ROKU stock still has room to run that so many smart investors have yet to understand the ROKU model, the brilliant Anthony Wood strategy to build a successful company by taking advantage of the massive move from cable to CTV and providing necessary services to consumers, content providers, and the associated adtech network.

Continued massive growth ahead for ROKU.
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but that doesn't seem like much of a moat to me.

Oh well. They have a dominant market share that they are pulling away with.

The non-ROKU or non-FireTV smart TVs are not an adequate experience. I’ve been using FireTV for years and there’s no way I’d ever use the clunky experience on my Samsung TV. And ROKU is pulling away from FireTV so they have either a better product or a better strategy or both.
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Roku's moat is ease of use. When dealing with the public that's a pretty strong moat. And if the OS on their TV is Roku they're not going to have a choice but to use it. I am concerned however Roku may be running out of tv makers to sell to and not get much higher than their current 33%. When Samsung has 33% of all TVs sold. That leaves another 33% max to go after.
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Darth: Respectfully that should be obvious. Billions of ad impressions. What else are you going to watch you tube on. A phone? To stream it on the TV you make a deal with ROKU and Amazon, etc.

Haha. Saying "respectfully" doesn't magically make a condescending statement respectful.

And yes, a phone! I'm sure countless people consume YouTube that way. Yes, streaming through Roku or Fire is a common way to watch Youtube on a television, but I'm suggesting that Roku and Fire benefit more from this than YouTube does.

Darth: And ROKU is pulling away from FireTV so they have either a better product or a better strategy or both.

That's wrong, according to this, because it's FireTV that has more eyeballs: https://www.fool.com/investing/2019/05/16/heres-how-many-fir...

hmcproperties, that was a great list. You kind of broke it down to hardware, subscriptions, commissions, and advertising. Leaving hardware aside since it's not a path to great profits, I would imagine the lion-share of their platform revenue comes from advertising, but as I said, it would be really nice to have a breakdown. Within advertising, your points here seem like the key ones. I'd guess 90% of Roku's revenue comes from:

8. Advertising: Roku makes money when Roku sells the ad inventory it gets from all ad-supported publishers (including YouTube). Roku gets ad inventory from publishers in lieu of taking a cut of each publisher run add because Roku feels that it is too hard to track and monitor. Roku prefers to just take ad inventory in exchange for the extended audience reach Roku provides.

9. Advertising: Roku makes money on when selling Roku's own add inventory on Roku's own channel; The Roku Channel.


It's extremely hard to understand how they somehow make $21/year per user and rising. Sure, as Darth said, "billions of ad impressions." But for the impressions from #8 above, shouldn't almost all the revenue go to Netflix, Youtube, HBO, etc?

I would guess #9 is a tiny amount, but I don't know for sure. Have they said how many of the 9.4 billion hours watched last quarter were on their "Roku Channel?"

Thanks,
Bear
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The non-ROKU or non-FireTV smart TVs are not an adequate experience. I’ve been using FireTV for years and there’s no way I’d ever use the clunky experience on my Samsung TV. And ROKU is pulling away from FireTV so they have either a better product or a better strategy or both.

What are the numbers Darth? We know that Roku has 30 million subscribers, Amazon does not give out their numbers but if you have them please post them. I don't believe Roku is pulling away from Amazon because of prime day and how many firesticks they sell.

I think people pick their tv because of the picture not the os. Then they go out and pick a box to try on their tv. Samsung is trying to incorporate the Tv as the screen to the smart home, controlling everything including the tv. That is interesting. Amazon is trying to do the same thing with Alexa. I see this as a big fight with Google, Amazon, Apple, Roku all fighting it out.

Here is an article dated 2019 discussing all the tv platforms.

https://www.techradar.com/news/television/6-best-smart-tv-pl...

Andy
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No. of Recommendations: 0
Bear,

From the standpoint that I am not very "tech oriented"; I compiled the list of revenue sources having read various articles over the past few days; Digiday, TechCrunch, TMF and a few others. You ask a number of good questions that I too am looking to answer.

Although I am not a SeekingAlpha subscriber; there appears to be a rather topical, subscriber only article that ran on SeekingAlpha dated April 22, 2019 and titled "How Does Roku Actually Make Money". That may unlock a few more of our questions, but I am unable to access.

For what its worth for this discussion, the lead-in to the SeekingAlpha article introduces the topic of Roku's revenue being broken down into three streams:

1. AVOD - Advertising Video On Demand,
2. TVOD - Transaction Video on Demand, and
3. SVOD - Subscription Video on Demand.

To date, the problem I have had deciphering revenue streams is that Roku appears to lump advertising revenue into "Platform Revenue". Perhaps a deeper dive into the ER or CC transcript may unlock some answers.

Harley
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Harley, I looked at the 10k. They don't break down platform revenue. They say it's made up of advertising and subscriptions.

There are multiple ways Roku generates revenue, many of them irrelevant. For example selling operating systems to tv makers is not a meaningful addition to revenue but it is a source.

The way I see it and what's important is getting Roku operating systems anywhere and everywhere so people use the Roku Channel and watch the advertisements. Every market share report I see out there says Roku is the dominant streaming operating system and the lead is growing. Not sure why the disconnect with amazon FireTV market share.
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The way I see it and what's important is getting Roku operating systems anywhere and everywhere so people use the Roku Channel and watch the advertisements. Every market share report I see out there says Roku is the dominant streaming operating system and the lead is growing. Not sure why the disconnect with amazon FireTV market share.



Amazon Fire TV’s lead over rival streaming platform Roku is widening. In January at the Consumer Electronics Show in Las Vegas, Amazon said it had “well over” 30 million Fire TV users compared with Roku’s then 27 million active users. In roughly four months’ time, Fire TV has grown to more than 34 million active users, according to new statements made by Amazon this week. Meanwhile, Roku grew its account base by 2 million in the first quarter of 2019, to reach 29.1 million active accounts, per its earnings report this month.



https://techcrunch.com/2019/05/15/amazon-fire-tv-tops-34-mil...

Andy
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YouTube was pulled from the Fire TV system a while ago. Not sure if it's still there. But Amazon just made a browser based workaround. So from that standpoint it seems the platform needs the content more than the other way around, at least when Google and Amazon are both selling add on devices.

It's hard for me to get Roku. The last time I was in the market for a TV about 2 years ago my research led me to Samsung, LG, Sony, and Vizio. I didn't even know RCA was still in business until I saw it was a partner on the Roku site. They seem to have cornered the market on lesser known TV brands but does that mean they will hit a ceiling and any major TV brand will use their own system?

They are producing, and maybe simply replacing lower end legacy TVs will be enough for growth. Relying on cord cutting for growth does seem a bit risky as the major cable companies could always just decide to offer their own packages to compete with cord cutting (especially Comcast if NBCUniversal ever gets a streaming service going).

Maybe these long term issues are irrelevant. Just follow the money which shows Roku hitting it out of the park, and wait to respond when the issues actually materialize.
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Andy -

Thanks for the link. That article does appear to give Fire TV the lead in accounts. The other way it can be broken down is the number of devices. From that perspective, Roku might have the lead. From the most recent shareholder's letter (https://ir.roku.com/static-files/df3d060c-0975-4903-83d3-0e1... ):


A range of studies confirms the strength of Roku’s position in the U.S. marketplace. According to Kantar Millward Brown, Roku is the #1 TV streaming platform in the U.S. by hours streamed. Last month, Strategy Analytics reported that the Roku operating system powers 41 million OTT devices and smart TVs in the U.S. This is 36 percent greater than the next closest competitor and expected to grow. Recently released Parks Associates consumer survey data reveals Roku had 39% of the US streaming media player installed base as of Q1 2019.


There's an accompanying chart detailing the Strategy Analytics info that's worth a look. Regardless, I view all these sources as reinforcing the idea that Roku is seeing success in increasing the number of eyeballs using it's platform even when you acknowledge competition does indeed exist. I'll likely remain a shareholder as long as that trend continues.
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Roku’s streaming TV platform accounted for more than 30% of US sales of connected TV devices in Q1 2019, further increasing its lead in streaming TV platforms according to the latest research from Strategy Analytics. The report, USA Connected TV Device Vendor Market Share Q1 2019, finds that there are now more than 41 million Roku-based devices in use, including Roku media streamers and Roku-based smart TVs, accounting for 15.2% of all media streaming devices. Roku now has a 36% lead over the next major platform, Sony PlayStation, in terms of devices in use. The report predicts that this lead will stretch to 70% by the end of the year, largely as a result of the success of Roku’s smart TV partner strategy.

https://www.businesswire.com/news/home/20190626005529/en/Rok...

ROKU absolutely dominates installed base and sales in the US. There may be a number of reasons for the disconnect with MAU numbers, namely Roku’s lack of a substantial international presence. Maybe difference in the way they define MAU.

This was what I was referencing though. I’m not sure of the maturity for ad supported content in other countries, but I’ll try to have some more comments later when I have more time.

The most important thing is Streaming Hours. Roku rules streaming hours I believe, though I’m having trouble finding where I read that. It is in the shareholder letter, but I was looking for the source that had more details. Again that’s US based.

I’m in a FireTV household myself, but what I’ve researched has shown that ROKU is the dominant player here.

Darth
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Hey guys, there are now 37 posts on this ROKU thread and people seem to be repeating and repeating what they, or someone else has said. I'm not asking to stop the thread, but how about easing off unless you really have something new to add.
Thanks,
Saul
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There's an accompanying chart detailing the Strategy Analytics info that's worth a look. Regardless, I view all these sources as reinforcing the idea that Roku is seeing success in increasing the number of eyeballs using it's platform even when you acknowledge competition does indeed exist. I'll likely remain a shareholder as long as that trend continues.

I think your right Stocknovice. I like the numbers they are putting up so I have changed my mind. I think I will take a position in them. I don't like that they are a closed system but if they can get a third of the streaming it would be huge.

Thanks to all for the discussion.

Andy
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No. of Recommendations: 6
I've been considering the relative merits of Roku and The Trade Desk for a while now. In the end, I think they have about an equal opportunity in the advertising space.

In Roku's case, if you peg the future CTV ad market to eventually reach 200 billion, give Roku 1/3 of streamed hours, and 30% of ad revenue streaming through its service, you're looking at peak revenues of about 20b.

In The Trade Desk's case, if you peg the entire programmatic market to eventually be at 1 trillion usd, and allow for The Trade Desk to be transacting 10% of programmatic spend through their platform, and taking 20% of that as revenue, you're also looking at peak revenue of 20b.

Which of these scenarios is more likely? That's surely an exercise in speculation. But it's clear that both companies have the potential to become behemoths.
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ROKU absolutely dominates installed base and sales in the US. There may be a number of reasons for the disconnect with MAU numbers, namely Roku’s lack of a substantial international presence. Maybe difference in the way they define MAU.

Darth, I believe international presence is exactly it. ROKU's OS has a huge lead in US market share. Amazon FireTV has more users at this point. And from what I have read, Amazon and Roku are counting active users in the same manner (don't know where I read it nor do I have the article handy but they are essentially the same).

Roku only just started investing in international markets. In the company's fourth-quarter letter to shareholders, management said it's increasing its international investment this year. While the company doesn't expect those investments to show any meaningful account growth this year, it says the benefits of those investments will start showing up in 2020 and beyond.

So Roku created a business worth $15 billion just concentrating in US, and just started selling international. What remains to be seen is whether Roku can duplicate it's huge market share lead in other parts of the world. I'm staying long while this one plays out.
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YouTube was pulled from the Fire TV system a while ago. Not sure if it's still there.

I bought an Amazon Fire TV a year or so ago on Prime Day. I got it for a great price.

It has a variety of apps on it to include YouTube, Netflix, news apps, sports apps and more. I've read the various posts on Roku and I recently opened a small position in the company. However, I'm wondering how long I will hold it. I don't see a moat for them. I do see a huge moat for Amazon and I'm holding the few shares I have. I don't believe their growth is over yet.

Fool on,

mazske

Long AMZN
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So Roku created a business worth $15 billion just concentrating in US, and just started selling international.

International is a market for CTV/OTT ads that still is ripe for hyper growth. Still almost completely untapped. And being that ROKU is almost entirely US and is accelerating ad revenue approaching 100% mark, US is just getting starting too.

End of 2017 data is the most recent I can find.

Pixalate measured worldwide Connected TV/OTT programmatic ad impressions throughout 2017 for this study. The United States easily leads the way, with 85.7% of all Q3 2017 programmatic TV ad impressions being served in that region.

85% up from 75% earlier in 2017. Do we think this trend has changed much?

http://blog.pixalate.com/programmatic-tv-connected-ott-unite...

From same research company different article.

According to Pixalate's data, Roku dominated the Connected TV/OTT programmatic ad space in 2017.

In January 2017, Roku accounted for over one-third (36.2%) of the space:

By October 2017, Roku had nearly doubled its market share, up to 68.8%


*note that all ads on OTT/CTV are not programmatic, so yet another number to be curious about.

If you overlap this data with that of the other data about dominate and expanding US installed base (where the money has been) and platform revenue (which is mostly advertising) accelerating from 79% in Q1 to 86% in Q2. Seems pretty compelling.

Darth
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No. of Recommendations: 9
Bear,

Wanted to follow up after doing some research. Saul, sorry to continue this but hope it adds materially to the discussion.

What do people stream?

From MRQ 10-q:

In the six months ended June 30, 2019 and the year ended December 31, 2018, Netflix and YouTube accounted for more than 50% all hours streamed in each period.

YouTube is **NOT** paying Roku

From 10-Q:

although YouTube’s free ad-supported channel is the most viewed ad-supported channel and the second most viewed channel overall by hours streamed on our platform for the six months ended June 30, 2019 and the year ended December 31, 2018, we do not receive material revenue from it.

You were correct! It turns out there's lots of ad-supported choices out there -- but they're far less popular. That said, they're apparently adding enough incrementally to get the market excited.

Best,
Brian
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Wanted to follow up after doing some research. Saul, sorry to continue this but hope it adds materially to the discussion.

Brian, it does! This is why you're my favorite Fool writer. Well, that and your constant clear writing...which I haven't seen as much of lately...I wish the Fool would make a better feed so I better could follow the writers I like. Sorry, tangent.

In the six months ended June 30, 2019 and the year ended December 31, 2018, Netflix and YouTube accounted for more than 50% all hours streamed in each period...we do not receive material revenue from [YouTube]. (and I assume Netflix either)

I'm not surprised Netflix and Youtube account for 50%. So that's $0 revenue on 50% of the hours streamed. It makes it all the more amazing to me that Roku is making $21/year per user! I actually think the ad buyers are getting ripped off. Think about it. Netflix gets what, a little over $100/year per subscriber. $21 for ad supported content is a lot! They're touting 9.4 billion hours, but half are unrelated to ads.

Makes me nervous more than it makes me interested. But I'm sure others see it differently.

Bear
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TWLO – It’s no secret I’ve been questioning the size of my Twilio allocation the last couple of months. This month I finally took action and pared it down considerably. My final steps to get there consisted of two parts. First, I dug into their 7/31 earnings:

stocknovice,

This was a really outstanding portfolio review writeup! I particularly liked how you analyzed each situation and recent business results and linked that back to your decisions.

I have been having similar thoughts to you about TWLO. I had a large 17-18% allocation on TWLO for a while and I also had made a rather large options bet on a stock move to the upside after the past earnings result. It ended up being my largest options loss of 2019 (about a loss of 1.2% of my portfolio value). I didn't think TWLO's result was horrible or anything but I was disappointed that they didn't hit it out of the park like the past 2 earnings. I was hoping that Flex would see more traction and that TWLO would start to see some synergies from their SendGrid acquisition. Also, with Signal 2019 coming up, my options bet was based on seeing a continuation of their recent massive earnings beats and some exciting announcements out of Signal.

Recently, I reduced my TWLO allocation from 16.1% down to 12.1%. One third of the proceeds will be reserved as cash to pay for my capital gains from my TWLO sale. The other 2/3 of the proceeds were used to buy ZS shares to boost my allocation to 13.2%.

I still think TWLO will be a great investment but now I just don't know how long they will start seeing financial rewards from Flex and the SendGrid cross-selling. The next near-term hope for TWLO may be the spend on TWLO from the 2020 US Presidential Election. Last year, TWLO had a rather large one time revenue benefit from an election in another country. I think we can expect that the spend on the US Presidential Election will dwarf that other election. When will the spending start and for how many quarters will the spending last?

Chris
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I'm not surprised Netflix and Youtube account for 50%. So that's $0 revenue on 50% of the hours streamed. It makes it all the more amazing to me that Roku is making $21/year per user! I actually think the ad buyers are getting ripped off. Think about it. Netflix gets what, a little over $100/year per subscriber. $21 for ad supported content is a lot! They're touting 9.4 billion hours, but half are unrelated to ads.

Bear,

Do you mean to say ad sellers are being ripped off? Roku is an ad seller. Or is Roku ripping off ad buyers (companies that buy ad inventory on Roku)?
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It makes it all the more amazing to me that Roku is making $21/year per user!

Hi Bear,

From Roku's shareholder letter, their annualized revenue from platform alone (not hardware) just hit $672M this latest quarter (multiply $167M by 4). They have about 31 million user accounts, so you simply divide $672M by 31M, and you get about $21 per user per year.

The important thing to note is that the $21 per user has grown from only $17 per user 12 months ago. Why is it growing? It's because each user is viewing more streaming hours that are ad-supported this year compared to last year. Total streaming hours went from 5.5 billion a year ago to 9.4 billion today.

See https://ir.roku.com/static-files/df3d060c-0975-4903-83d3-0e1...

Ron
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From Roku's shareholder letter, their annualized revenue from platform alone (not hardware) just hit $672M this latest quarter (multiply $167M by 4). They have about 31 million user accounts, so you simply divide $672M by 31M, and you get about $21 per user per year.

This is not the correct calc ROKU uses for ARPU.
Take the average of subs from this Q and the same Q last year. Take TTM platform revenue divided by that number to get ARPU.

AJ
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Thank you, SAUL, and your team! So important to have this perfect, helpful BOARD.

SO DISCOURAGING TO SEE MY PORTFOLIO GO DOWN AGAIN, TODAY..EXCEPT FOR WONDERFUL ROKU!!!
A good time to buy more?
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No. of Recommendations: 17
SO DISCOURAGING TO SEE MY PORTFOLIO GO DOWN AGAIN, TODAY..EXCEPT FOR WONDERFUL ROKU!!!
A good time to buy more?



I'm sorry, STJ, and I understand your enthusiasm, but that post is a Poster Child example of a post that doesn't add anything to the board but just takes up space. Please think before you post: "Does this post add anything to the board?"

Thanks

Saul
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No. of Recommendations: 44
I think there are two aspects to ROKU that have been "under-discussed" here.

One is the perspective of a small to medium content provider that would like to get their content out there, but doesn't want to lay out monthly fees for this privilege, nor has the technical and logistical capability to worry about their own ad-serving.

A number of people here seem to ask the "why would X give up their ad revenue to ROKU" question without really considering what it takes to be able to serve ads. SERVING ADS IS NOT A TRIVIAL UNDERTAKING. It actually takes a lot of infrastructure (people, hardware, software) and know how. Think about it for a second: you have to have a software platform that allows potential ad buyers to browse available ad inventory, select one of multiple possible ad formats, see ad targeting information (viewer and content statistics, etc.), manage the concept of ad campaigns, test/pilot potential ads, submit ads for placement, see statistics on ad performance, etc. etc. etc. And if you want to be a modern ad platform, you better have some machine learning and other advanced capabilities in your platform too, or the Google's and Amazon's and TTDs of the world are going to eat your lunch and no one is going to place any ads with you. And, btw, even if you have a software platform that does all this, you are STILL going to need a kick ass sales team to attract ad inventory away from the giants.

So, yeah, if you are YouTube, you've already got all this infrastructure, and you have no reason to give away any of your ad inventory. But if you are just about anybody else (including not small names like BBC, Discovery Channel, Fashion Network, etc., etc.) it's a very different story. In fact, when ROKU comes along and says: "hey - as long as you have the content, we'll put it on our 39m user network, help you create your app, stream your content for you, basically provide everything else - and you don't have to pay us a single dollar in upfront fees, or worry about anything - we'll do all the work and just take a cut of the ad revenues for ads shown to people who watch your content" - what are you going to say? I think you might say "OMG, this is AWESOME, where do I sign?!"

Remember, most apps on Roku are NOT YouTube. They are small to medium content providers who just want to get their content out there without a lot of work or upfront cost. The Roku value proposition is VERY appealing to these people.

Now the other aspect to ROKU that's been under-discussed in the consumer aspect. There are a LOT of people out there who are looking for near-free content options. A LOT of people don't want to pay any monthly content fees AT ALL. There are also a LOT of people out there who maybe pay for Netflix, but can't afford to pay for anything else. Yet they still like to have choice in what they watch. Here, Roku's marketing is key. People know that when they buy a Roku, they pay once for the device, and then they get tons of channels for free. Sure, they are not HBO or Showtime, but the sheer choice is nice, and that lack of a monthly fee goes a long way. They also know that YouTube will work. And they know that if they do have that one paid service like Netflix, that will work too. And they know that they will get a nice remote and best in class usability.

Now maybe those people might consider an Amazon FireStick as well. But the first thought in their head might be, well, it's Amazon, so I've got to have Amazon Prime to get real value out of this thing. Maybe they have it, maybe they don't (again, lots of people do NOT like to pay Prime annual fees). Even if they do have it, they probably think about YouTube next. Hmm, I heard YouTube is a pain in the butt to use on Fire devices. You have to jailbreak them and stuff. That consideration alone will kill it for 95% of people out there. Then they might think about AppleTV for 5 seconds. YouTube is no problem, but then they will see the price. Wait, I know - why not just get a cheap Roku device where everything works nicely?! Click - there is another user for Roku! When you think about it this way, it's pretty apparent that Roku's support for YouTube (even though they get minuscule revenue from it) is actually a brilliant move.

Now put these two factors together.

One one hand, Roku is a godsend for every second and third tier content provider out there, all the way from the BBC down to some pretty niche and specialized content providers. Sure, none of them are Netflix or Hulu individually, but combined, they are the rest of the content world, and there are still some pretty big names in that mix.

And on the other hand, every user who is watching their wallet, but still wants to have a broad choice of free content available to them, is also choosing Roku. Which, of course, gives Roku even more eyeballs, and more data for their machine learning algorithms that feed the ad targeting features of their ad platform. Which ultimately makes their advertisers happier. Which makes them pay more and place more ads with Roku rather than with someone else.

I don't know about you all, but that strategy really clicks for me.
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Hi Shikotus,

Now maybe those people might consider an Amazon FireStick as well. But the first thought in their head might be, well, it's Amazon, so I've got to have Amazon Prime to get real value out of this thing. Maybe they have it, maybe they don't (again, lots of people do NOT like to pay Prime annual fees). Even if they do have it, they probably think about YouTube next. Hmm, I heard YouTube is a pain in the butt to use on Fire devices. You have to jailbreak them and stuff. That consideration alone will kill it for 95% of people out there. Then they might think about AppleTV for 5 seconds. YouTube is no problem, but then they will see the price. Wait, I know - why not just get a cheap Roku device where everything works nicely?! Click - there is another user for Roku! When you think about it this way, it's pretty apparent that Roku's support for YouTube (even though they get minuscule revenue from it) is actually a brilliant move.

This is incorrect. Amazon and Google have made up. Also, saying that people do not like to pay Amazon prime, well those would be the same people that do not like to pay for Netflix. But with Amazon prime you get so much more then just streaming video.

YouTube is returning to Amazon’s lineup of Fire TV products, and the Amazon Prime Video app will be adding Chromecast support and become more widely available on Android TV.

https://www.theverge.com/2019/4/18/18412525/youtube-amazon-f...

Andy
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Thanks Andy, good to know Amazon and Google have made it up. I think it actually very much proves the point that Roku has been smart to stay neutral and consumer focused. It sounds like Amazon and Google have realized that while they fight, others gain the advantage, and put their differences behind them. Good for them. I think my broader point stands, though, which is that Roku's long-standing branding and marketing of their devices as maximally consumer-friendly, provider-neutral, and affordable has been well-executed, and continues to win them customers (especially ones that don't necessarily follow all the latest development like you and I might). I also think that pound for pound, Roku still has the smoothest, most visually appealing, least-cluttered user interface and the best overall user experience of the three.
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No. of Recommendations: 5
fantastic post shikotus..

part of the reason ROKU has been highly volatile and under-appreciated for a long time is this lack of understanding of its value prop to its multitude of stakeholders. What you described is amazing insight to me.
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