The Cycling of Roku (NASDAQ:ROKU) between Institutions may Create Opportunity for Retail Investors

By
Goran Damchevski
Published
September 16, 2021
NasdaqGS:ROKU
Source: Shutterstock

Roku, Inc. ( NASDAQ:ROKU ) is a US$42b Market Cap stock, whose business model is TV streaming with ads. In the last year, Roku shares have netted a return of 88% to shareholders. The stock has been cycled multiple times by large funds and trading is still quite active. Investors will get a better sense of how the stock might progress if they know who is behind the buying and selling.

Knowing who owns a company can help us understand how that stock may move in the future. This is because certain funds employ reliable strategies in their investment, and this can give us a gauge on the implied volatility of the stock.

For example, knowing that most of the stock is owned by passive funds that employ long strategies may make us calmer v.s. knowing that the stock is owned by funds that are actively managed and market their investing as "high return", these may be more aggressive in buying up and disposing shares, leading to more volatility.

In the graph below, we see the distribution of ownership for Roku:

  • Insiders 12.7%
  • General Public 23.5%
  • Institutions 63.8%

Note that Roku also has class B shares, which have effectively the majority of voting power in the company, as they represent a voting power of 10 to 1 compared to the A class common shares.

View our latest analysis for Roku

ownership-breakdown
NasdaqGS:ROKU Ownership Breakdown September 15th 2021

What Does The Institutional Ownership Tell Us About Roku?

Institutional investors commonly compare their own returns to the returns of a commonly followed index. So they generally do consider buying larger companies that are included in the relevant benchmark index.

We can see that Roku does have institutional investors, and they hold a good portion of the company's stock.This suggests some credibility amongst professional investors.

In the last period, Roku has been issuing new shares, but it seems that the institutions are not that interested, and a good portion of shares are left to retail investors. Shareholders have been diluted by 7% and Roku raised some US$1.15b in financing. 

Lest take a look at the fundamentals and see what might be the reason for this disposition amongst large investors .

earnings-and-revenue-growth
NasdaqGS:ROKU Earnings and Revenue Growth September 14th 2021

It seems that the company is making US$2.3b in revenue and converting that to US$180m in free cash flows. With this structure, it looks like most of the value for the company lies in the future, and investors are having disagreements on the true value of the company. 

In the last 12 months, the company's revenues grew 72% while their costs of goods sold scaled along at 45%. This means that the company is able to scale by a factor of 1.59, but will have some limitations on profitability as COGS will weigh down future margins. Scaling is important, as revenue growth alone will not account for an increasing share price. At this pace, it seems that Roku is on its way to achieve 20%+ EBIT margins in the long term. However, a lot more than that may be speculative and part of the reason why we see the stock moving around so much.

If you want to see how we bring all the fundamentals of Roku to an intrinsic value of the stock, take a look at our valuation model HERE .

Since institutional investors own more than half the issued stock, the board will likely have to pay attention to their preferences.

With a 13% stake, CEO Anthony Wood is the largest shareholder. With 6.2% and 5.9% of the shares outstanding respectively, FMR LLC and The Vanguard Group, Inc. are the second and third largest shareholders.

After doing some more digging, we found that the top 15 have the combined ownership of 50% in the company.

The list below is very revealing on who holds the company and how they have been trading their stake in the last few months.

ownership-change
NasdaqGS:ROKU Insitutional Ownership Change September 14th 2021

This shows us that the stock is still being highly traded by institutions and some of the highest holders such as: FMR, ARK, and BlackRock have reduced their exposure, while others like J.P. Morgan have near doubled their stake.

Insider Ownership Of Roku

Insider ownership is positive when it signals leadership are thinking like the true owners of the company. However, high insider ownership can also give immense power to a small group within the company. This can be negative in some circumstances.

Our most recent data indicates that insiders have US$5.4b worth of shares in their own names. As we mentioned above, the CEO has the majority control by way of his ownership of class B shares which have 10 to 1 voting rights v.s. A class of common stock.

That's quite significant and shows a healthy amount of skin in the game, but lack "checks and balances", pertaining to the interests of general shareholders.

Most would say this shows a good degree of alignment with shareholders, especially in a company of this size. You can click here to see if those insiders have been buying or selling.

Conclusion & Next Steps:

Roku is being frequently cycled amongst institutional investors, with FMR, ARK, and BlackRock recently reducing their exposure to the stock. While J.P. Morgan seems to be doubling their interest. Keep in mind that some of this data may be outdated because investors have some time before they have to disclose their holdings.

The company's value lies mostly in the future, and this is very sensitive to the margins they manage to attain from their business model. Investors are still in a highly speculative phase of investing, and we may continue to see large movements of the stock.

The CEO has the highest single stake in the company, and majority control because of his class B share ownership. This is both good because it means that management is aligned with the interests of shareholders, and also bad because it would be hard to push back on bad decisions.

While it is well worth considering the different groups that own a company, there are other factors that are even more important. Case in point: We've spotted 3 warning signs for Roku you should be aware of.

If you are like me, you may want to think about whether this company will grow or shrink. Luckily, you can check this free report showing analyst forecasts for its future .

NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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