3 Reasons Roku Stock May Be Peaking

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Roku (NASDAQ: ROKU) was a rock-star debutante on Thursday. The IPO was set to price between $12 and $14; it hit the market at the high end of that range, and it still wasn't enough. The stock soared 68% on its first day of trading, opening sharply higher again on Friday.

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Roku stock has nearly doubled in less than two trading days, and it's easy to wonder if the market finally has that hot tech IPO that will crack open the floodgates of promising companies chomping at the bit to go public. The digital media player is special, but it's probably not that special. Let's go over a few of the reasons your best bet may be to bail on the new market darling.

1. Growth isn't as strong as you probably think

Roku seems to be a hot rookie. Its prospectus boasts that active accounts have ballooned 43% to 15.1 million over the past year, and that its platform is serving up 60% more streaming content than it did a year earlier. 

However, Roku's top line doesn't convey that kind of momentum. Revenue climbed just 22% last year, and it's up a similar 23% through the first half of 2017. Growth investors banking on headier growth at the other end of the income statement will be even more disappointed. Roku is not profitable, and it doesn't expect to be in the black anytime soon.

2. It's not making as much money as you probably think

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Roku pioneered streaming to the TV, but this has become a crowded marketplace. Hardware sales at Roku are actually down through the first half of 2017. All of Roku's growth this year has come from the platform revenue it generates, primarily when owners sign up for services through Roku.

With Roku's large audience streaming more than ever, this may seem like a great model, but Roku doesn't generate money from all of its content distributors. Netflix (NASDAQ: NFLX) -- the undisputed top dog that accounts for a third of the streaming activity on Roku devices -- is "not material" to the revenue that Roku is generating. YouTube is the top dog on the platform for ad-supported streaming, and it doesn't drum up any revenue at all for Roku.

It's true that Hulu and hungrier platforms will jump at the chance to generate leads through Roku, but the viability of that as a business model remains to be seen. As Netflix and YouTube show, once you're established, you bring your own traffic. 

Average revenue per user, or ARPU, has risen 35% to $11.22 over the past year. It's probably not a good sign that ARPU isn't growing as fast as that 43% spike in active accounts and the 60% in usage. Another important nugget, here, is that while ARPU is a monthly figure for most companies, Roku's ARPU is based on the past four quarters. Yes, Roku's ARPU is actually less than a buck on a monthly basis. 

3. Competing against Amazon is as hard as you probably think

Roku realizes that the market it pioneered has been taken over by the titans of tech. Apple TV, Google Chromecast, and Amazon Fire have sold millions if not tens of millions of devices to turn TVs into entertainment-spewing operating systems. Let's talk about Amazon.com (NASDAQ: AMZN) specifically.

Amazon is dangerous because it's not afraid to sell hardware at or below cost. It's gunning for market share, and whether that means selling its entry-level plug-in with voice-activated functionality for less than $40 or partnering up to get its own platform onto actual HDTVs, wherever Roku is ,there's a fair chance Amazon is nearby.

One thing you used to be able to say about Roku is that it's not conflicted. It may not be generating material revenue out of Netflix or any revenue from YouTube, but it's largely agnostic beyond lightly nudging users to the video services where it is making bank. Amazon has Prime Video and its digital rentals and purchases to push as the prime objective of Fire TV accessories. However, in a likely attempt at growth to justify its post-IPO life, Roku launched its own ad-supported streaming service earlier this month. It's no longer merely the middleman. Roku and Amazon are in a stare-down contest, and Amazon rarely loses.

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Rick Munarriz owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has a disclosure policy.