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Roku (ROKU) Shares Plummet as More Companies Enter the Streaming Race

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Roku (ROKU - Free Report) shares closed down almost 14% on Wednesday as social media giant Facebook (FB - Free Report) announced that they would be jumping on the streaming bandwagon. Facebook shares didn’t move much on the announcement as they closed slightly in the green. Cable TV provider Comcast (CMCSA - Free Report) also announced today that they would give a free Xfinity Flex streaming box to internet-only subscribers. The announcements from Comcast and Facebook were headwinds for Roku shareholders as they felt unsure about the streaming market becoming even more saturated.

Facebook’s Second Generation Portal TV

Facebook is getting into the streaming game with its launch of a new set-top version of its Portal device. This latest launch from the social media giant adds to the bet the company has made that the future of smart homes will be social. The second-generation Portal devices will include one with television chat and video-streaming capabilities. All models will be equipped with speakers and a camera that tracks people as they move around in a room. The devices utilize AI to focus in on voices as well as create special effects and casual games for friends.

The new line of products announced today come as an update of the original products that Facebook released back in October. The previously released Portal devices were praised for their simplicity but got caught up in Facebook’s privacy issues and data mishandling at the time.

To address this, Facebook emphasized in a demonstration of the new devices that users would have the choice to withhold sending their data to Facebook. The new model designers also stressed the many physical features that would clearly demonstrate to users when the device was off and not filming them.

On top of its video chat features, the Portal TV device will allow users to stream content from Facebook, Amazon’s (AMZN - Free Report) Prime Video, Spotify (SPOT - Free Report) , and a number of other services. The new launch puts Facebook in the heat of the battle between companies such as Netflix (NFLX - Free Report) and Amazon for market share. The head of Facebook’s hardware business, Andrew Bosworth, wasn’t fazed by the competitors in the market as he noted that the Portal’s strength and distinguishing feature is its access to people.

What Does This Mean for Roku?

Roku is tiny compared to the tech and telecom giants that spend billions to compete in the streaming video market. Despite the disparity in size, Roku shares have skyrocketed 323.9% in 2019 thus far. The potential of more competition presents a risk to investors betting that the company will grow into its more than $15 billion market cap. However, an area in which Roku may be able to separate itself from the pack is in advertisement revenue and the streaming companies it has signed on.

Facebook’s Portal TV confirmed that it would offer Amazon Prime and Facebook but it has not yet signed up Netflix or Disney’s (DIS - Free Report) upcoming streaming service, Disney+, to its platform. Disney has confirmed that Disney+ will be available to stream on Sony’s (SNE - Free Report) PlayStation 4 and Roku devices. Roku already has a vast number of streaming services available on its platform, which can help grab consumers who like variety.

Despite the vast number of streaming options Roku offers, the company’s success hasn’t been based on hardware sales. Roku makes most of its money when its users start watching. The company’s greatest source of revenue since 2018 has been advertising. The streaming firm does this through its partners’ ad-supported videos, on its home screen and even on the buttons of its remote. This puts Roku in prime position to rake in revenue when companies are increasingly looking to advertise on its platform instead of on cable TV.

Bottom Line

Facebook’s second generation Portal device has launched the company into the streaming market and is looking to put its social networking spin on streaming and smart home devices. Portal TV is definitely an innovative concept, but the ongoing privacy issues and antitrust investigations against Facebook will continue to be headwinds for the firm and its new product.

For Roku, competition from Facebook as well as Comcast will be something investors will need to keep an eye on, but advertising revenue should continue to fortify the company for the time being.

Both Facebook and Roku sport a Zacks Rank #3 (Hold).

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