Roku’s upcoming IPO will test investor appetite for consumer devices after Fitbit plunge

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Consumer devices have lately been a sinkhole for public investors. The adventure camera company, GoPro, has declined by 38 percent in 2016 and is trading 63 percent below its IPO price from 2014. Fitbit, on the other hand, has performed even worse. The shares of the fitness tracker went down 61% in the past 12 months and 71% below its debut price in 2015.

Very similar challenges are also faced by Roku, the company which manufactures devices for shows and movies. Roku is in direct competition with the largest consumer device companies — which happens to be the world’s most valuable businesses also.

Those brands have much greater marketing budgets and brand recognition that are much bigger than that of Roku’s. The company has to compete for shelf space in retail establishments, admitted Roku in an IPO prospectus filed Friday afternoon.

“Competition is intense for these resources, and a competitor with more extensive product lines and stronger brand identity, such as Apple or Google , possesses greater bargaining power with retailers,” stated Roku in the filing.

“In addition, one of our online retailers, Amazon.com, sells its own competitive TV streaming products and is able to market and promote these products more prominently on its website, and could refuse to offer our devices,” continued the company.

Sales at Roku, which comprises revenue from subscriptions on the platform and from the device, increased by 16% in the last quarter to $99.6 million. Its net loss, on the other hand, rose by about 10% to $15.5 million.

Investors have been valuing Fitbit and GoPro at less than one times revenue. Meanwhile, after demand dried up for its Bluetooth speakers and fitness trackers, Jawbone started closing down in the previous months. Also, Juicero, a juicing start-up shut down its shop on Friday.

Many other factors could contribute to Roku’s inevitable market cap. If the company cannot set a higher multiple than Fitbit or GoPro, it will be priced at less than $500 million.

‘A unique solution’

Roku has a tale that takes it out of just the hardware game. The company made 46% of revenue in the period that ended in July from advertising and subscriptions on the platform. More significantly, sales in that particular segment rose 95%, making Roku into more of a content and software company than a device maker.

Roku gets to earn ad revenue when people watch stations such as Vice and CBS News. On the other hand, for subscription services like Hulu and HBO Now, the company earns a share when people sign up from the device.

Several TV manufacturers also pay a fee for licensing to embed the service of Roku in their devices. The company revealed that this year, there would be 150 model available in the United States in contrast to 2016’s 100 models.

Roku will possibly be trying to persuade investors during its upcoming roadshow that its future is not in the sale of devices but in powering them.

“As smart TVs take over most of the overall TV installed base over time, we believe we can power a very large portion of TVs based on our unique solution for TV brands,” said Roku in its prospectus.