Chit Chat Stocks - Is Roku the Next Great Internet Platform, or Just a Commodity? With Alex Morris (Ticker: ROKU)

Episode Date: October 20, 2022

Roku operates two segments, Platform and Player.  In other words, the company offers products and services in the television/streaming industry. Roku was founded in October 2002 in San Jose, California. Listen as Brett and Ryan ask Alex questions about the company, its business model, and valuation. Enjoy the show! ***************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Alex's work? Follow him on Twitter here: https://twitter.com/TSOH_Investing?s=20&t=mFAJXmIT3_snJc9jSXdlkw Contact us: [e-mail] Timestamps Roku | (5:21) International Expansion | (23:12) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive interview where we have an analyst to discuss a single stock. And today we have on Alex Morris. He's been a friend of the show for a long time. And we're talking about Roku, which is fairly controversial. A lot of people either love it or hate it, surprisingly, since they're basically just a TV operating system. But it's a fun business to study because there's so many different angles. I really enjoyed this. alex always brings in a lot of insight that's really helpful and he's very concise and gets to the points that matter the most for companies did you have any highlights from the interview yeah we should say that he runs the science of hitting uh research service and sub stack so

check that out link will be in the show notes uh i mean yeah the highlights are just talking about you know the international expansion the relationships with youtube and netflix and and how they will benefit or not when these new advertising tiers and just advertising in general comes to connected TV, because it seems simple that advertising dollars go up, Roku benefits if they have more users, but it's really not that simple just because of the intricacies and relationships with all the content providers. But before we do that, so let's talk about our exclusive sponsor through the end of 2022, and that is Seven Investing, a research service that has been around for a few years now, and it has tons of research reports on various companies.

They release seven research reports a month plus more, but I want to highlight on this episode that because of all the research reports each month, they now have over 200 companies that have been covered and the benefits of the services that this compounds over time. So as subscribers ourselves, when we discover a new company or are interested in something, or kind of just want to learn the basics about something to kind of get a read on it. We'll go to 7investing, search if they have something. And if they do, it's great to read their write-ups that take about 10 to 15 minutes, give you a great overview of the business. And like I said, 200 different companies that span biotech, technology, growth stocks, value stocks, really the whole gambit. And if you want to

subscribe, use our code MONEY, M-O-N-E-Y at checkout, get $100 off your annual subscription subscription each year for life. That is a 25% discount. The link is in the show notes. That is code money, 25% off your annual subscription for life. All right, Ryan, I guess I'll introduce it. Let's get to the interview. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other

podcast guest is not formal advice or recommendation. Now, please enjoy this episode. all right welcome in today we are joined by alex morris now recurring guest of the show i'm not sure how many times you've been on but it's it's been a lot and today we're talking about one that i've wanted to talk to uh you about this one for a while and i think it's sort of a hot stock in the kind of financial community a lot of price is not the price is not hot but you just had the write up on Roku. Um, and it was very good. So I don't know any little short pitch you want to put on for the science of hitting before we get into the Roku, uh, discussion. Sure. And thanks again for having me on guys. I always, always enjoy being here. Um, so the science of hitting TSOH

investment research service for those people who don't know, I spent about 10 years on the buy side as an equities analyst. I was also writing online throughout that period. And I decided in April of 2021 to leave the job I was at and to start an online research service where I basically take everything I was doing in my day-to-day job and now deliver that to subscribers as write-ups every Monday and every other Thursday. And, you know, kind of one of the key features of the service is there's complete portfolio transparency about what I own, the weightings of the positions. Anytime I make changes, I disclose that to the subscribers before I do so, quarterly updates on returns etc and you know there's a growing list of companies that i've

done deep dives on some of which have have made their way onto the watch list or in the portfolio and as we were kind of talking about before we jumped on it's just kind of a recurring you know uh kind of portfolio manager view of of how to make decision making with each passing day so it's been a lot of fun to do it and yeah i'm incredibly thankful as always to everybody who subscribed yeah what company what companies that we had previously we covered airbnb on here they've done a write-up on and netflix uh so check those out if you like this episode yeah we are we got the netflix one justin uh we front ran oh yeah but yes yes he didn't stick around too long on that one it was uh i think good timing on that one that one did get a lot of listens netflix was in the

news uh fashion is pretty frequently in that time all right and today we were talking about i guess say, I guess you'd call them a peer to Netflix potentially, and it's Roku. And I think he posted a chart this morning of the volatility over the last couple of years, but it's been a wild ride for shareholders. So I kind of want to start there. Can you describe, I guess, the current situation with Roku? What's happened lately? What's led them to where they're at today? Sure. Just to put numbers on that chart, I think roughly speaking, we're talking about just north of 50 billion was enterprise value at the peak. And today, correct me if I'm wrong, I think it's six or seven, somewhere in that range. So it's down, you know, approaching 90%

peak to trough. So it's been a very significant move. And I was talking to my buddy, Bill Brewster earlier about coming on here. And I was just saying, you know, it's one of those names, it's kind of funny, if you didn't have any, any reference to the stock price, and you were just looking at the business, like there's clearly been deceleration here, as I'll get into in a second, But just one of those names where the stock price move is so much bigger than, in my opinion, at least, than what's happened in the business. So obviously, if things are crazy on the upside, then you can have some crazy moves on the downside. But it's just funny how market and business can really diverge from each other at times. You know, my kind of high-level view as I look back over the past five years is you go back to Q2 of 17, Roku had about 15 million active accounts.

You fast forward to today, Q2 22, it's up more than 4x to about 63 million accounts. In addition, you've seen an increase in usage among those accounts. Average account now streams about three and a half hours a day compared to two and a half hours a day five years ago. So as a result of those factors, over the trailing 12 months, our stream in the platform was 79.1 billion, which is up more than 6x from Q2 17. So obviously very, very significant growth. The other really important thing to note is that Roku has been much more effective in terms of their monetization on a per hour basis. So if you compare it to about five years ago, platform revenues per hour of viewership has increased from roughly 1.2 cents per hour, about a penny, to 3.3 cents per hour. So the combination of those factors is, because Q2 2017, when platform revenues were just shy of $150 million a year,

in q2 of 22 there were 2.6 billion so up nearly 20x which uh i think we can we can all agree over a five-year period is a pretty impressive growth um yeah now that's that that said you know the pandemic was a tailwind as as we've seen with a lot of businesses now we're dealing with a bit of a hangover and and roku is also being impacted by macro so i think the clearest way to to see The current pressures is the Q3 guide calls for something like low single digit revenue growth, which for this business, you know, it was consistently ticking off 30, 40, 50 percent growth for many, many quarters over the past five years. So it's a number that seemed kind of unfathomable as you look back 12 plus months ago. So, you know, the market's very concerned about what that means. OPEX is growing significantly faster than revenues in the interim or at this time.

and you know there's questions about saturation as we'll get into the company's been very successful in in the u.s and north america but there's questions about whether or not this is going to be a global business or not we've got a lot of we got a lot of questions on twitter about kind of the manufacturing side maybe the supply chain can you talk about how that's hurt them lately um and maybe some someone asked whether or not they should own the tvs themselves do you think that's the right way to go yeah it's kind of funny netflix when they reported uh i guess it was probably q1 they reported q1 they kind of laid out some factors for their slowdown and and sub growth and one of the things they pointed to was uh smart tv sales globally and i think

roku has kind of mirrored those comments in terms of there might have been some pull forward and obviously if you buy a new tv you don't necessarily need one 12 months later so on the back end and there's probably also some supply chain issues there. So unit sales have been a little bit more challenged. And then in the case of Roku specifically, we have to remember, of course, that they have kind of the smart TV operating system business, which is a bigger and bigger piece of the pie. But they also still generate a lot of revenue from selling the sticks and the dongles that you plug into the back of your TV to make it essentially a smart TV. And that's been under a fair amount of pressure lately. I think unit sales were down 16% year over year in Q2.

for the sticks and dongles and the other thing that roku has done is in order to kind of defend their position in that space because it still drives a meaningful amount of of kind of the streaming hours they've they've held on pricing and been aggressive in the face of cogs inflation so you know last quarter i i think the trailing 12 month number on that side of the business was a negative 22 gross margin the idea being that they'd pick it up on kind of the platform side as we'll get into, but they've seen pretty significant cost pressure there. On the issue of owning a manufacturer, I think that's a harder one to say. Given the current structure that they have, I think they've shown pretty well that they can make it work in terms of the

relationships that they have with certain OEMs. That said, there's a couple of different parts of this value chain, and that's not even getting into the content supplier side of it all. They're there's the OEMs, there's someone like Oroku or the other kind of OS players who don't manufacture their own TVs. There's some people that do both those things like Samsung. And then you also have the retailer component of this all, which is, I don't think it was a really big part of the story if you go back a couple of years, but you've heard more and more, especially lately with Comcast and Charter who have a joint venture in the US, they've had some discussions with Walmart about essentially letting them kind of be part of the economics of what happens beyond the sale of

the device. So it seems like some of that stuff is kind of evolving and changing. So it's obviously really important for Roku to continue to think about how they're positioned within that value chain. Yeah, we're going to talk about how they can defend and grow that position. But I think for a little bit of context, let's talk why the business has been so successful as opposed to what they're kind of planning for the future to give some listeners some context. So as you mentioned, platform revenue is 20X over five years. And I think when I calculated, I said something like 5X for the last three years. So really, really, really impressive. But I think the mystery is how they actually make money because people pull up the Roku operating system

and they think, oh, it's free. I just paid for this thing and I got this remote and I'm watching TV on here. Why is Roku making money off of that? So what are the revenue lines? And I guess when you research the business, kind of what stood out to you? Sure. So what's happening here at a high level as as we all know especially in a market like the u.s we're seeing a pretty significant shift from your live tvs over towards streaming i mean especially on the entertainment side less so on kind of live content news and sports but on the entertainment side of programming especially amongst young people there's been a massive shift from from linear to streaming and and you see that in the nielsen data with i think it's now at roughly 35 of all tv time is streaming and that's

up more than 500 basis points a year over a year. So management would say, and I think rightly so, that this is a structural trend that it eventually ends in a place where that number is a lot higher than 35%. They've had a tailwind there. Obviously, that impacts both the accounts growth and the hours viewed growth. So those naturally drive engagement on the platform. And then in terms of how you monetize that engagement, the main ways are when someone is on a Roku TV and they go to sign up for, let's say, Paramount Plus, if they sign up on the platform, Roku receives a distribution share as part of that process. The other thing that they've negotiated as part of a lot of these agreements, and we'll get into this on the Roku channel or TRC, is they've negotiated

agreements where you either have a cut of the ad revenues for something like an avon service or they get the company to contribute content that is available on trc which is you know the platform that they kind of manage so so long story short they've just driven overall usage of the platform in a major way and they slowly become more effective at at monetizing that usage and then And then the one other thing would be, you know, they do branded ad placements, basically. So if you turn on your TV and it's a Roku device, they have these kind of billboard type things. Someone could could buy placement there or, you know, on one of the buttons to promote a new movie or, you know, one of the buttons on the screen, I should say, to promote a movie. And then on the actual remote, those those are also branded placements, whether it's Netflix or Disney Plus or whoever.

So, it's a couple different opportunities for them to kind of show their value at. I think an interesting one they announced recently was something called The Buzz, which if they get people to start looking at this, it's a way for them to try to basically show you what's new and what's on these competing services. And to the extent that you can do that well, you can obviously appreciate how that could lend itself to bidding for that placement, essentially, advertising opportunities. So there's a number of ways that they rightly can generate or add value for their partners and then generate revenues around that. What do you think of the Roku channel generally? And then maybe as a customer, I don't know if you're a customer, but what do you think of it content-wise? And then what do you think the future could be there? You know, it's interesting.

I think there's a couple of different ways to think about it. Let's start with one, which is just purely the statistics that they've given recently, which is Roku channel is now a top five channel on the platform in terms of engagement, which is impressive. You know, on the other side of the coin, if you see, I saw some third party data, I think it's from Harris X that shows by their estimates that Tubi and Pluto, which are the closest comp to something like TRC, it's not even, it's not ad supported in the sense that people pay a lower fee like most people are used to.

These are fast. They're free. So you just literally are only monetizing ads. From the data that they have, they seem to show that Tubi and Pluto might be about 50% larger than Roku. So I think TRC has been in the right place in terms of offering something that is clearly much cheaper in terms of dollars spent than the SVOD tiers that kind of led the streaming wars, or at least from Netflix's perspective, for sure. um whether or not they're they're doing a great great job in the right you know peer group of 2b and pluto to me is a little bit less clear and you know from a business perspective i've just always found it interesting that we can talk about original content but even the idea of having the roku channel you know your your partners your key suppliers are these content companies and to some extent you're competing with them for engagement now as you start going down this route. And I don't have a great answer for why they did it, or at least I don't

know their thinking. One of my guesses is that they did it because they thought it could be supplemental to their core business. And maybe they even had questions about the real strength of their core business over time. To the extent that they think it's successful because of what they bring in terms of distribution, I've just always thought that that way of viewing the world kind of muddies what your business is. If you're an advertising business, that placement is not a free lunch. That's placement that could have been used that you're now giving up to support your own service. So you're kind of crossing lines as you start doing that. The other argument that I think could hold some merit is that TRC is a way for them to kind of demonstrate their ability to

more effectively monetize ad inventory. Management has been, lately management has been pretty positive on that actually being the case. I think the actions of the other content companies would make you question whether or not that's actually true. But I should add the kicker there that, you know, even if it was the case, you could hire CPMs on an after-take rate basis. I do think there's some inertia there, given that these major media companies have sales teams and the like, and they have their own methodology for

going out. If someone's making that decision, it's against their own job in order to sub that out to Roku. So I think there's a lot of moving parts there. We can drill in on any number of But I think it was a somewhat interesting idea. I think shareholders from the jump have been cautious about Roku going out and spending a ton of money on original content. And I think management, the commentary on the last call, at least to me, suggests that management is hearing those concerns and will not be making that move. So it'll be very comparable to Tubi and Pluto, where it's just going to be a bunch of content that is not necessarily exclusive. It's a lot older content. It's, you know, it's just different than what you're going to see on HBO Max, Netflix, Disney Plus, in terms of the new exciting content. Yeah. All right.

Do we want to, let's say the international expansion one, right? And talk the YouTube and Netflix negotiating leverage, because that I think fits into the Roku channel competition first. Well, I guess, so you talked a little bit there about their ad business. And that kind of seems like a point of contention where you've mentioned that, well, let's start with Netflix and YouTube. They're two biggest suppliers, I believe, are Netflix and YouTube, or the two biggest contributors in terms of engagement. Do they generate any revenue from them? And I guess, if it isn't material now, do you think they could at any point? yeah so just to give it some numbers i i think they've changed the wording as of two or three

years ago those two apps accounted for the majority of engagement on the platform youtube and netflix and the wording in the 10k from my reading wasn't entirely clear it's definitely immaterial i don't know if the number is zero but it's an immaterial contributor to their to their revenue they're not taking any of the you know for the clearest the clearest example they're not taking any of the ad inventory that's on that's on youtube that people are consuming on their tvs so yeah two platforms that account for a very significant percentage of their of their engagement are driving very little monetization um you know in terms of if that can change it's a very difficult question i think that for me this is where i i bring a certain

biases investment given i've i've followed and owned a company like comcast a pay tv distributor for a long time. And I've followed and owned content companies for a long time. And I've seen in the pay TV business in the US how the leading content providers can just take all the economics effectively. And Comcast has really no pushback because the day that ESPN goes dark on their service is the day that they lose a large number of customers. And Roku is in somewhat of a similar position um they've pushed back on on some big name apps most notably peacock and hbo max kind of around the time of their launch and they did get some concessions it seems mostly in terms of content for trc as opposed to less explicitly less explicitly a take rate um but peacock is

very different than netflix or youtube in terms of of your willingness to not have that be on your platform for days weeks months at a time so i just think it's a very difficult position and you know they've probably rightly chosen up to this point to focus their battles elsewhere and on top of that we're seeing both disney plus which i guess would maybe be the third most popular on the platform maybe fourth i don't know hulu could be more popular um and netflix both releasing the advertising tiers at the end of this year are they gonna because we saw netflix partner with microsoft and we saw disney plus partner with the trade desk does that leave roku out to dry even though a lot of these ads are going to

be played on the roku platform or could they benefit maybe over the long run um i guess it's hard to tell there's so many moving parts there but any thoughts on that yeah the short answer is i don't know and it was a you know it was a in my write-up i as you guys know i think you They've even said this to me in Twitter DMs that this write up for me was less conclusive than a lot of the things I've written, because I I think there are open questions here that I personally don't want to be closed minded on. And I think there's ways that I could I could potentially be proven wrong or see a different, you know, different version of the story than than what I see today. I haven't heard anything in the press about these upcoming launches of these AVOD services from Netflix and Disney, which are coming, you know, we're like a month out now. So they're coming soon. These things need to be settled. I haven't heard anything, but if Roku managed to negotiate a pretty meaningful cut of the inventory or a meaningful cut of what's delivered to the customers in terms of the revenue share, I think that would force you or force me to kind of reassess some of the conclusions that I've made.

So for me, it's currently a wait and see. I'll be very curious to see if that relationship changes from kind of what it is today. This episode is brought to you by ourselves. If you're hearing this now, we know you're a Chit Chat Money listener, but if you want to get more than just our free episodes, you can become a Chit Chat Money Plus subscriber. Within the subscription, members get access to our weekly Not So Deep Dive episodes, our monthly episodes detailing one of the holdings in our investment fund, Arch Capital, and then they also get written work, so newsletters and research files to go along with each Not

So Deep Dive episode. Am I missing anything? We should talk about the themes that we do each month. So each month we choose a theme based on whatever we want. So last month we did video games. This month we're doing housing. Next month we're doing engineering software, I believe. And then the following month we're doing website and e-commerce software.

We choose those because it's, you know, a great way to investigate a different industry. And if you want to subscribe to CCM Plus, go directly through Apple Podcasts or Spotify or through the link that will be in each one of our show notes. It is only $5 a month. You heard that right. $5 a month. Perfect to try out. If you like what we have to offer, we hope you'll subscribe. Now, a big thing on getting a negotiating leverage is international expansion. And outside of Mexico and Canada, which have been quite successful, I mean, Mexico has been very

successful. It's kind of been a dud. Why do you think that is? And is there a potential for that to change? Because if I'm looking at it as a potential investor, if they really capture the European market, that could give them a lot of negotiating leverage versus Netflix, who is huge in that region. Yeah, it's funny. The first time I looked at Roku was probably a handful of years ago, let's say three years ago. And one of the first things that stood out to me when I did that work was when I looked at the 10K, the P&L for the international segment. I expected to see that Roku was spending not insane amounts of money, but let's say $50 million a year to go and try to win in these other regions. And obviously, there's how the costs are accounted for between

US and international could be part of the explanation. But if you look 2017 to 21, Roku's international segment has broken out in the 10k actually made a little bit of money, where as a long term investor or business owner here, you would think the argument could be made for them losing a significant amount of money over that period, as they put people on the ground and try to you know gain some scale um you know from where we stand today from the data i've seen i look at a research firm called conviva roku isn't a top five player in europe or in latin america and they have you know mid single digit market share in those regions and the people that they're competing with are you know google amazon samsung like very very strong competitors who um to the

the extent that bulls want to argue that roku has a defensive position in the united states which they've done a very good job defending over the past couple years that you know they call that that 30 35 percent market share i think you have to flip the question and ask how does how does that look as you think about trying to you know take down the incumbents in in europe or lat am wherever it may be so i think that's a it's a tough slog um they've had success in canada and mexico and i think that's that should be applauded but i think to the extent that they do it elsewhere around the world at a very minimum it's something that would likely take many many years so i i'm certainly personally not too optimistic on what that looks like which you know getting back to the

start of this conversation you know you you start to get to a scary place if if you're at 60 million accounts and as they've said recently vast majority are in the u.s or in north america at least you know you're getting closer and closer to something that looks like penetration so uh that that can be a problem for the growth algorithm okay that kind of leads me to ask one of the questions we saw on twitter which is basically do consumers actually care what their tv operating system is like do you think they roku has any sort of sustainable advantage that's the ultimate question here yeah i think i think there's certainly there certainly are consumers who care. I think Roku has fairly established a brand image as an intuitive, easy to use product

with all the major apps, et cetera, et cetera. And by the way, that's someone who has gone around stated Airbnbs, that is not standard across all TVs. Not all TVs have what you consider the five, 10 major apps. So Roku has all the major apps, the very easy to use interface. It's generally sold on low cost you know high quality tvs i'd say given the price point that you're paying i think they do have a bit of a brand you know how how meaningful is that in someone's purchase decision i'm a little bit less sure obviously it probably makes more of a difference if you already have two or three road crew tvs in your house it would probably make more of a difference than if you've never owned them before um it was funny i was walking around costco here recently

and i noticed and maybe it's just my local costco i'd be surprised if that's the case but I didn't see a single Roku TV. And it just kind of surprised me in terms of their ability to defend themselves on the position that they've built, really, in many ways, led by price, I'd argue, or that's certainly been a major component of their value prop to the customer. i wonder how defensible that is and again getting back to the to the comcast you know charter walmart discussion if walmart can share in the economics more fully on the back end that could presumably give give the ability to be more competitive on pricing on the front end on the hardware so um i'm up in the air on that one i'm not entirely sold but you do have market share data that that shows roku has been very successful at defending their position so i don't know what totally attribute that to, but there's no doubt in my mind that they've been successful at that

in the US. Yeah. It makes me nervous when you're competing with Amazon, especially when you're selling on their own site as a low cost provider. I think this sort of example, maybe, I don't know, maybe you're thinking about it this way where you have, say, I don't know, like Roku's negotiating with Netflix and for some reason they decided, okay, we're not at a good point. We're going to take netflix off of roku if that happened one a lot of consumers would be upset and two they would be able to buy an amazon fire tv uh whatever plug-in for 30 bucks and replace it right away i think that is kind of the point here where even compared to it in my mind uh do you think it's worse than what it was it would say comcast and pay tv because you don't have that kind of set

top box monopoly um that's differentiating yourself yeah well again you know to the extent that these agreements are global which i'm not i'm not sure if they are or not but you know think about what it does it does to roku as they think about these markets where they're fighting with the incumbents i mean it's one thing to say hey we're pulling netflix in the u.s and that's pretty painful for both parties but manageable for netflix if you're roku and you're launching in new markets and now you're taking that logo off of off of your boxes uh that is a very bad place to be so i i you know as they sit down in those negotiations i my sense would be that as you talk about you know the handful of leading players which again account for a very significant

percentage of of overall engagement and i'm sure we'll talk about consolidation potentially in a minute i i just think it's a very difficult conversation to have again very similar to what a traditional mvpd dealt with as they sat down with you know a disney or an nbc universals oh yeah i guess let's combine these two questions we had here because they're essentially asking the same thing so you mentioned the write-up and i thought it was a really good point that the new video services are at a disadvantage versus the established players i guess youtube's its own beast but versus say netflix if they're not paying that take rate to roku the economics are just better for them. Maybe describe what that is. And also, if you're long Roku, do you theoretically

have to be short Netflix because you don't want them to continue to gain market share within CTV or just TV watching in general on the Roku platform? Yeah, on the first point, I mean, here's a pretty simplistic way to think about it. Let's work under the assumption that each hour of viewership is is the same in terms of consumers willingness to pay the cost per hour is the same to produce that content etc etc you have you have service a a that generates a billion dollars a year in revenue i have service b that generates a billion dollars a year in revenue but i'm kicking you know 15 to roku as a take rate so my my net number is 850 and you're working off a billion And, you know, that makes it pretty difficult for me to actually compete over time, assuming I don't have advantages elsewhere in terms of IP ability to produce more effectively per dollar spend, et cetera.

So that's kind of how I think about it from that regard. And obviously, as you think about potential consolidation, you know, that gives player A an ability to pay a price for player B that for a public market investor or someone who's not going to get that benefit from the purchase, that gives them the ability to pay a price that may not make sense otherwise. So that's kind of what I meant in that regard and how it could potentially, you know, it's one factor among many in terms of thinking about scale advantages and disadvantages across these various services. But it's an important one as it relates to Roku. On the long Roku short Netflix thought, I think it might be a bridge too far or just a tad too smart in terms of, for one, as I said, Roku is something like 30%, 35% market share in North America or in the US, and obviously a much smaller number as we talk about globally. So Netflix, to the extent that they actually were forced to share some of the economics,

it would apply to you know a relatively small percentage of of their actual usage and the other thing to consider is you know when when someone buys a new roku tv and simply logs into a to a already active account you know roku's not not getting paid on that they're only getting paid to the extent that they're involved in kind of the activation so and you know as time goes by a very large number of people who buy new tvs or new devices are are already going to have you know accounts that they're simply logging into so um i don't think even to the extent that roku managed to to start demanding more of the economics i i don't know how much it would move the needle for netflix or at least not in a massive way okay so you raise a good point there

which is the longer that i guess a lot of these streaming services are around the more likely someone already has an account, which means subscription activations will probably become a more muted, I would assume, percentage of Roku's platform revenue. So my thought would be they're going to go towards advertising. You mentioned that the Roku's management team thinks they have higher CPMs, better advertising business than others. If you are one of the content providers let's take hulu ad supported for example or disney plus ad supported what's the like would you feel encouraged to give any of your ad inventory to roku or if if that's the case if the cpms are really higher or would you still try to keep them in house i mean it's

certainly logical right i mean if my if my net number is higher than it would be otherwise after accounting for a take rate it would certainly seem logical to do that now but as i was trying to kind of point out earlier the person who's making that decision may have a different calculus than than you or i would as outside business owner because that decision may mean that their job is less important than it was otherwise because today they may be responsible for filling that inventory or signing an agreement with you know the trade desk or whoever else would be involved with that process, as opposed to saying, hey, we're outsourcing this to Roku. We get 105% of what we got previously, so this is what we should be doing. That may put a little bit less work on

their desk and may impact their comp or even if they have a job. So I think that might be a relevant consideration, just the sales force and the teams that have been built behind these major media companies i'm sure there's some shifts happening internally but it's probably fairly slowly moving if i had to guess um but yeah that to your point like it just seems to me i mean even in terms of competition right like how it kind of goes to what i was saying a moment ago about a streaming service that pays the tax versus not paying the taxes roku's ability to license content that is identical to tubi or to pluto if they actually monetize it more effectively they should be able to, you know, they have more money to work with on the same amount of engagement usage,

whatever it may be. So that advantage should, should poke through in some way. Again, I don't know how real that is today. I take, I take management's comments on, on that with, with the grain of salt for sure. Yeah. Here's now we've seemed a bit bearish, I think on our discussion here, but I think maybe one other reason to be, or two other reasons to be bullish. I'm interesting to hear see your thoughts on this because i know you follow the industry closely they have with the roku channel as well potentially that you know operating system advantage where they can promote stuff to people and they maybe have more data on the customer and second that management has hyped up um i guess hyped up yeah hyped up is probably the right word

that advertising dollars are on a lag with usage and that even though even if say usage for ctv doesn't even grow over the next three years you'll still see growth as it's kind of on a three-year lag any thoughts on that or whether that could be beneficial to roku yeah i think i mean as a broader point i think it just it just gets to the overall growth of the platform in terms of number of users you know activity per user etc there's there's certainly a very strong tailwind on a global basis there's a very strong tailwind i'd argue for both of those things to continue happening and you know for me one of the hardest things as i've worked through this and it's very bullish in my opinion i just struggle to to really explain it is that is what i indicated earlier

this idea of an hour of engagement being monetized from a penny five years ago to three cents today i mean it's a massive increase the the arpus over that period of time have gone from you know something like $9 on a trailing total month basis in mid 2016 to roughly $44. It's gone up 5x in terms of average revenue per user. So they've seen significant traction in terms of their ability to more effectively monetize the average Roku user. I think what's partly gotten muddied in all this is like a lot of these businesses, the OpEx has also grown fairly significantly. And now that revenue growth has slowed down, that's hurt them in a big way. But you're seeing that pretty much across the board with names like this. The other thing is just understanding

what really is driving that growth. And I think there's a real question, how much of that is attributable to the fact that there were a number of high profile services that launched in late 20, early 21 that had very good reason to spend. And if consolidation happens, what does that spend look like i don't think that's i don't think that stuff really goes away but maybe it was at a level that is is higher than might prove sustainable um but again to the extent that they can deliver eyeballs to these different services and you know as you were saying a minute ago on the idea of everybody already having an account you know there there might be churn and other things that i don't know if roku would monetize from that person reactivating the

account, but they certainly could monetize in terms of selling the advertisement that gets somebody back to that home screen to reactivate. So I think they can really leverage their position in a lot of ways, but I continue to think that the best way to do that is in terms of advertising, less so in terms of some of the divergence that they've had with Roku Channel in terms of money and probably more importantly, in my opinion, management's attention. what do you think of management anthony wood ceo what what do you think of him what do you think of their i guess capital allocation so far yeah i probably uh i'm not too set on these conclusions i feel fairly decent about management

i'd say you know i've read a couple things about anthony wood that make me slightly concerned i'm forgetting his name now the guy who who was at roku who basically ran a lot of these negotiations especially with big names like Peacock and HBO Max, and was a very important part of the team from everything I've read. You know, I think the thinking was that he was probably in line to be the next CEO. And it was made clear that Anthony Wood didn't want to go anywhere. And he basically decided to leave the company. So, you know, that struck me as a pretty important person at the company who decided to leave because I guess, from their perspective, they were not giving enough responsibility or enough of, you know, the ability to really move up in the organization

from where they were at. So I think that's a little bit concerning when you lose somebody like that, who's so high profile and so important to the core of what I think the business may need to be successful over time. But in general, I don't have a big knock on the things they've done, you know, even the, like we were talking about before we hopped on, even like the smart appliance stuff. I, you know, I, I see how people can laugh at it and think it's not a good direction for them to go in you know i also kind of think it's small potatoes and that you can test things like this and it can still be you know a reasonable thing to do okay i guess we have maybe a couple more questions but five years from now do you think netflix and youtube combined will have as more

or less engagement as a percentage of overall streaming time that's a good question hard one though that is a very good one um if we're assuming that neither of those two players especially netflix um is involved in any sort of m&a i'd say their share is lower um i think you've pretty clearly seen and from the data i've seen recently you know especially the fast services that i said earlier you've seen a lot of success for the plutos the tubies even even roku channel and obviously you know other services like hbo max and peacock are you know they're obviously starting from a small base it's hard to go down from zero you can really only go up or at least stay flat um but i think they've you know they've shown more and more especially in key markets like

the u.s that they're they're going to be real players um the question in my mind will be as i've as i've written on disney and netflix and a couple of these names is you know if you're not going to be a global player what's kind of the end state for for your content in terms of whether you licensed international markets whether you find a way to combine with somebody else to get scale and there's a real open question there um so we'll see but outside of m&a i think it's it's likely that both of those companies have a smaller overall share of the pie yeah and i guess it's tbd on the netflix ad tier because if that's uber successful maybe maybe that trend reverses and they take some of that but i guess the the free tiers are a totally different uh animal as well yeah it's

interesting question to ask as you as you have gone from you know where Netflix was at whatever a couple years ago we'll say when they really were we're still stamping their foot down on this that will never have ads now you've moved here for me for me from what I see in both the Nielsen data and other data sources I it seems to me that ad supported especially has taken a good amount of engagement share over the past you know year or two and the fast services have taken a significant amount of engagement share over the past year or two so you i think it is a open question one to truly be considered by these companies is whether or not a fast service should be part of their strategy moving forward and fast is just free ad support free ad supported okay it might be

you know very limited in terms of what content's on there may have a high ad load you know there might be certain product features that are commensurate with the fact that it's free but But I do think it's worthwhile for these companies to consider whether or not that has any place for their business. Okay. I think last question here, what do you think of the valuation? The market cap, I believe, is just below $7 billion today, I think you mentioned. Yeah.

It's gone below $50 a share. I mean, it's totally gone and bombed out. Yeah. I mean, I think they have, if I'm not mistaken, I think they have $2 billion in net cash, something like that. Yeah. I think that's around right. I was looking at matches balance share before we hopped on here.

So I could be getting, I could be getting guppy stuff. Um, yeah. So enterprise value is, you know, whatever, $6 billion a day, something like that. Um, you're paying two times annualized platform revenues, which is certainly a lot cheaper than what this traded at a couple of years ago. Um, you know, peak TTM margins, EBIT margins when things were going well were low double digits. So if you apply that to kind of the current revenue base,

you get something in the $300, $400 million range. So yeah, it doesn't look nearly as expensive as it did six or 12 months ago. You know, for me, the real question would be, you know, whether or not you think that revenue growth can really continue, which is going to have to be led by, I think, international growth.

I mean, accounts growth, but really international growth will have to be a lever at some point just as a result of saturation. And then the other one, as I mentioned before, is this ARPU component of the equation. You know, you got $44 a day to own the stock. I think you probably got to have some thoughts on where that goes over time. And personally, I'm just not well-versed enough yet to make a strong argument for if that's, you know, at $60 in five years or if it's at $100 in five years.

So I think you need some thoughts there. um yeah and i think the other thing is as i kind of mentioned before just keeping an eye on on the developments that are happening now with two major two major avod launches coming in the u.s or for two of the leading players in the u.s over the course of the next pretty sure both of them launch by year end so you know in the next 30 to 60 days something like that um i'm very curious to hear whether or not whether or not roku is is part of the economics there and you You know, management, as far as I remember, management has been saying that in order to launch these services, there would need to be basically like new agreements with these companies. It wouldn't fit under the umbrella of what they agreed to previously.

So we should hear some noise about this in the near future. And if Roku, you know, is commanding a significant cut of the pie, then for me, it's going to require a reassessment on what I've concluded so far. All right. Well, I think that's all the questions we have. If listeners enjoyed this, check the link. I'm sure we'll have it in the bio to Alex's writing. He's done. He did a comprehensive Roku deep dive and he's covered plenty of companies that are not on our podcast. So there's more to it than just what he's talked about on here. That is all the questions we have. Right? You're not. Okay. So thank you, Alex, for coming on. We got to throw our disclosure on here. Brett and I are not financial advisors, so anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital.

So clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you guys next time. Hey, Simon, we wanted to ask you a few questions about 7investing so listeners could get an idea of what they're getting. What inspired you to start the company and what exactly is 7investing? Well, hey, Ryan, thanks again for having me. From years of working in the investing industry, it was inspired by conversations with people that would just always have kind of the same negative perception of the stock market, right? It's, it's too hard, or I don't have time for

this for this to stack against me. And those conversations kind of led me to say, hey, we need to create a site that actually does inspire people to say you can take control of your financial future. You can invest in stocks, you can find good stocks to buy and hold for long periods of time. And at the end of the day, too, we know that everybody is different. We don't believe that there is one stock that fits for everyone, right? Maybe you're a dividend loving, paycheck cashing income investor that might want an option that's going to be a lower risk dividend paying stock, especially right now with the economy being what it is. And then other people might say, hey, I'm ready to hold on for 20 or 30 years. I want to take some swings for

the fences. Let's go after those high growth opportunities. And so I said, this would be something that would be even more fun rather than just doing educational and by myself. I said, what if I brought together a team of seven advisors, all with a diverse background and a diverse perspective of the stock market? So we could uncover more stones and look at a bunch of different stocks with a bunch of different investing styles and a whole bunch of different industries. And so seven investing is kind of the genesis of all of those that we started in March of 2020. And we said, let's look at a whole bunch of different stocks. Let's do the legwork of the analysis and let's present our seven favorite actionable ideas every month for investors to choose from.

And let's start the conversation about which of these stocks is right for you and which one might be the right fit for your portfolio, knowing that investing is a very personal thing. All right. If you are a subscriber of 7investing, what do you get? Can you give an overview of what subscribers get? On the very first of every month, Brett, we release our seven new recommendations. So we are coming up on October 1st here, at least in the recording of this.

And, you know, on October 1st, we'll release seven recommendation reports. Some of them will be low risk. Some of them will be high risk. Some of them will be biotech. Some of them will be financial services. We run the full gamut. And as a member, you get immediate access to all of the new reports. But you also get access to all of our old recommendations as well.

We track all of them in real time on our scorecard at 7investing.com slash recommendations. And we also provide company updates on all of those previous recommendations as well. We check in on how things are going. And sometimes we even see red flags that we think people should be aware of. There's risks for any opportunity at the time that you recommend it. And sometimes it's really needed for investors to kind of understand the risk and reward relationship. And then the last part of it is, in addition to issuing new recommendations and providing

updates on them, is we know that this is a long-term journey. We know that investing is something that we want to take years, if not decades, to accomplish whatever we want to get to as the end goal. And so we always, every month, make it a point to be very available for our subscribers to ask us questions. We have a members-only call right in the middle of every single month. We have a community discussion forum that we have available 24-7 to not only talk to our advisors, but also other investors. I think that's one of the key differentiators for 7investing is that we know this is a long-term journey. We know it's a very personal thing.

We know they're going to have questions along the way. We don't want to just broadcast stock picks and disappear. We want to be here with you throughout this entire journey. And you mentioned, so seven recommendations each month. Sometimes those might be repeats, but obviously there's a lot of companies now in the 7investing universe. So how do members get a grasp on the advisor's conviction around certain ideas? Like which ones do they have a way of knowing whether advisors like certain ones more?

That's the most common question we've gotten, actually, since we started is what's your favorite ideas right now? We've done the diligence on almost 200 unique companies now and put them on the scorecard and people would say, hey, this is too much to keep up with. How do I even know where to start? And so we've kind of evolved as a company. One thing that we've started doing is best buys every month. Each advisor gets to pick any of their or another advisor's previous recommendations

and put the flag on it that says, this is my best buy for October. And we publish those for subscribers. The other thing that we've started doing is issuing conviction ratings on companies that are also right there on the scorecard. So if you see a previous recommendation, we go everything from potential sell, which is the most negative flag we can put on a stock, to strong buy, which is the most positive bullish flag that we can mark things with. And you can filter through all of those to really quickly see, here's some of our favorite opportunities. And we've taken this even one step further now, Ryan, which is we've created a strong buy portfolio, where every quarter now we've gone ahead and self-selected as a team. through a pretty methodical process, our 20 favorite ideas, our 20 highest scoring companies

that we've collectively come up with, our favorites of the entire scorecard. And we put these into what we're calling a strong buy portfolio that we publish each quarter. Also available as an added benefit for no extra charge for seven investing members. All right. Last question here. What does it cost to become a seven investing subscriber? And as we'll talk about, or we have talked about before, if you're a listener, use code money to get $100 off your annual subscription. That's right. We do have a monthly option. You can come in and check out the entire scorecard for a month just to see what you're looking at for $49 a month. But our most popular plan is actually the annual option because it's at a discount to that. In fact, we've got a

discount on the discount, like you mentioned, Brett. $399 for the year is our annual option price. But if you use money, the chitchat money promo code, it's down to 300. So you're basically getting the subscription for half price. If you sign up for the annual offer with that promo code, that does not expire after the first year. As long as you remain an active subscriber, you get to lock in that $100 off a year benefit. All right. Well, as he mentioned, use that code money. Thanks for joining us, Simon. Thanks very much for having me. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad.

I get it. I'm Siyaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.