We're doing something a bit different today. We want to give you an update on what happens when Wall Street gets the accounting dead wrong... on an opportunity that we just detailed.

On Wednesday, we explained how investors deeply misunderstand the financial situation with streaming-device maker Roku (ROKU).

After all, when viewed through a traditional accounting lens, Roku looks like a terrible company. Its as-reported return on assets ("ROA") number is negative.

But as we wrote:

When we apply our Uniform Accounting metrics, the distortions from as-reported accounting statements are removed – including capitalization versus expensing leases and research and development, and stock option expense distortions – and we can immediately see that Roku has much stronger ROA than the market realizes.

Not only that, but Roku has been profitable for as long as it has been a public company.

But shortly after our analysis was published, Roku's stock got crushed – ultimately finishing down close to 14% on the day.

What happened? How did we get this so wrong so quickly?

Well, it turns out to be great news for you.

You see, nothing has changed...

Roku is still a fantastic business that is making way more money than Wall Street thinks.

As we detailed on Wednesday, ROKU is likely to win even as other companies like Amazon (AMZN), Disney (DIS), HBO, and Apple (AAPL) battle each other in what the media is calling the "streaming wars."

In order to watch these streaming services on your TV, you need to hook it up to a magic little device. Your set-top box won't cut it anymore.

Cable giant Comcast (CMCSA) knows this...

And Comcast is terrified about losing the advertising and viewership data it gets from people using its cable boxes. It has even run promotions for Internet-only clients over the last few years where cable and Internet bundles are cheaper than Internet service alone.

And on Wednesday, Comcast announced it was entering the streaming wars... In a desperate move to try to retain that data, Comcast is offering its Xfinity Flex streaming box to Internet-only subscribers for free, after charging $5 a month previously.

Social media giant Facebook (FB) also announced its second attempt to enter the streaming wars on Wednesday. It released a $149 "Portal TV" streaming device that will ship later this year.

Of course, Facebook released a video and chat "smart speaker" last year... to crickets. And Comcast's free offering is one of dozens of streaming boxes available. Still, the two announcements caused something of a stir, causing Roku shares to drop nearly 14%.

But competition from giant media companies is nothing new for Roku...

It's been competing against pricey smart TVs, the Amazon Fire TV Stick, Google's Chromecast, Apple TV, and others... for years.

We look at Wall Street's reaction as an opportunity... as we mentioned on Wednesday, Roku has been profitable for as long as it has been a public company.

An extra competitor in the streaming wars won't change that.

Roku makes great products in a successful niche. It also benefits greatly from the growth in streaming services over the last several months.

So we see the drop as an opportunity in a company that Wall Street still doesn't understand.


Joel Litman
September 20, 2019