Roku Inc (Nasdaq: ROKU) got off to a hot start to its public life on Thursday when the highly anticipated IPO closed its first trading day up more than 67 percent. IPO investors appreciate the instant gains, but long-term investors should think twice before getting burned by the red-hot stock.
On the surface, Roku has a lot of good things going for it. The streaming video device maker generated $398.6 million in revenue in 2016, up 25 percent from the year before. According to Statista, Roku streaming devices have a higher household penetration rate than devices made by other heavy-hitters in the tech world.
As of April 2017, Roku devices were found in 16 percent of U.S. households compared to a 14 percent penetration rate for the Amazon.com (AMZN) Fire TV, an 8 percent rate for the Alphabet (GOOG, GOOGL) Chromecast and a 6 percent rate for the Apple TV (AAPL).
But while Roku may have beaten these other devices to the market, competition is only going to get tougher in years ahead. The company is already having difficulty turning a profit, and it is facing a challenging transition from hardware sales to subscription revenue.
In addition to a difficult competitive environment, early Roku investors need the stock to buck the trend of high-profile tech IPO disappointments in recent years. The most highly anticipated debut of 2017, Snap (SNAP), started off with a bang back in March, closing higher by 44 percent on its first day of trading. Less than seven months later, the stock is now trading nearly 16 percent below its IPO price.
But Snap certainly isn’t alone. In fact, stocks of eight out of the 10 largest technology sector IPOs of all time declined by between 25 percent and 71 percent in the 12 months following their first day of public trading.
“Many times we see buying pressure drive the price higher initially, but this only increases the incentive for existing shareholders to sell – which can result in price declines after that initial buying surge subsides,” Commonwealth Financial Network chief investment officer Brad McMillan said earlier this year following the Snap IPO.
The next big catalyst for Roku stock will likely be…
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