Investors haven’t had much reason to be happy about Wall Street’s recent spate of hyped IPOs, with Blue Apron (NYSE: APRN) and Snap (NYSE: SNAP) putting in disappointing performances amid competitive headwinds, dicey financials, and uninspiring growth strategies.

Streaming entertainment icon Roku, the maker of those ubiquitous little black smart-TV boxes, is preparing to IPO on the NASDAQ under the symbol ROKU in this environment. Taking on more vertically integrated giants in the space (including Alphabet and Apple), the company has managed to wrestle away a leading market position.

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But can the success continue and break the spell of high-profile IPO letdowns?

Playing the field

Roku has benefited from its close-but-not-too-close relationship with Netflix and its wide program offering. (Roku's genesis was driven by Netflix's early decision to not create its own streaming video player.)

Apple doesn't offer Amazon Instant Video on the Apple TV; while Amazon doesn't have Apple's iTunes on its Fire TV. Roku, on the other hand, has a much wider set of offerings including second-string services like Walmart's VUDU. It also, unique among the major "over-the-top" (OTT) set-top box makers, offers content through cable providers like Charter and Comcast Xfinity—although you might pay an infuriating "access fee."

The key factor has been Roku's focus as a content deliverer, not a producer of its own exclusive shows and movies. If you wanted a single device with access to the maximum number of streaming providers, Roku has been your best bet (outside of iTunes users, but Apple fanboys are used to the "walled garden" approach by now).

A differentiation that will be made even more important by Disney's decision to pull its content from Netflix in order to facilitate the creation of its own OTT streaming service, starting with ESPN in 2018, enabled via the acquisition of BAMTech in August. CBS's new Star Trek series will be exclusively broadcast on its CBS All Access OTT service, as well, demonstrating how serious legacy content producers are taking this format.

A format that, according to eMarketer data, will attract 168 million viewers in the United States this year—up 10.1% from last year.

This fact, along with Roku's competitive price point, has garnered the company a leading and still growing market share: According to Parks Associates, Roku enjoys a 37% share of the U.S. streaming device market, up from 30% last year. Compare that to Google and Apple, which have fallen to 18% and 15%, respectively. Amazon is second with a 24% share, up from 16% last year.

Roku's IPO

Both Roku and Amazon are moving to integrate their software into new "smart" television sets. Roku enjoys a 13% share of this market, up from 8% last year. The presence is driving impressive user metric growth: Roku's active accounts increased about 43% YoY to 15.1 million, according to its S-1 filing.

Roku's IPO

Glenn Hower, senior analyst at Parks Associates, notes "Roku emerged early as a US market leader for streaming media players, and the company has held firmly to that position."

A feat made more impressive by the size and resource disparities in play. For instance, according to the PitchBook Platform, Roku has raised a little more than $208 million in VC funding since its 2002 founding, while Apple is sitting on more than $260 billion in idle cash. Roku's most recent funding round in November totaled $45.5 million at a $992 million valuation with participation from Viacom. The company's other backers include Menlo Ventures (35.3% pre-IPO stake) and Fidelity (12.9%).

Roku was reportedly in talks to secure another $200 million in late-stage financing earlier this year at a $1.5 billion valuation. The company could be valued at roughly $1 billion in its IPO, according to an earlier WSJ report.

What comes next

Roku's offering comes as the company looks to leverage its position to transition from focusing on selling low-margin consumer devices to enjoying a slice of the high-margin subscription and advertising dollars its hosted content creators enjoy. This week, the company launched its very own ad-supported streaming movie service, the "Roku Channel."

Platform gross profit has increased from $9 million per quarter in 2015 to nearly $34 million in 2Q of this year; while player gross profit has to just $3.4 million last quarter, down 68% QoQ. Another metric, average revenue per user, has been on the move as well: From $3.80 in 1Q 2014 to $11.22 in 2Q 2017.

Roku's IPO

As more companies like CBS and Disney move into the space—and as established streaming players look to defend their turf—Roku's position as an agnostic platform provider will likely engender the leverage necessary to extract profit sharing and royalty fees. And the never-ending cycle of television upgrades—from HD to 3D and 4K—will feed the need for steady hardware sales.

Private market participants will certainly be pulling for successful listing, as a dearth of recent IPO activity specifically and exit activity generally threatens to further depress PE & VC return multiples.

Read more of our featured IPO content here.

Article by Anthony Mirhaydari, PitchBook

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