Roku, Inc.: Initial Public Offering

Abstract

In September 2017, a senior portfolio manager at Portland Capital Management had all her attention focused on the upcoming initial public offering (IPO) of Roku, Inc. The company had just updated its initial filing to indicate an offer price between $12 and $14, and Portland Capital Management had an opportunity to take a substantial position in that offering. She saw the upside potential in Roku's shift from hardware-related revenue streams (player sales) to platform-related revenue streams (advertising and content purchases made on the platform). But she was also well aware of the riskiness of this strategy and the uncertain state of IPO markets at that time.

Excerpt

UVA-F-1855

Aug. 7, 2019

Roku, Inc.: Initial Public Offering

On September 19, 2017, Michelle Wu, a senior portfolio manager in the Emerging Growth Strategies group of Portland Capital Management, had all her attention focused on the upcoming Roku, Inc., (Roku) initial public offering (IPO). Roku had just updated its initial filing to indicate an offer price between $ 12 and $ 14, and Portland Capital Management had an opportunity to take a substantial position in that offering. Just how substantial was up to Wu. She had recently attended a Roku-sponsored event at the San Francisco Hotel intended to generate interest in the offering, and Wu saw the upside potential in Roku's shift from hardware-related revenue streams (player sales) to platform-related revenue streams (advertising and content purchases made on the platform). But she was also well aware of the riskiness of this strategy and the uncertain state of IPO markets at that time.

Wu was not the only person with mixed feelings about a Roku IPO. Recent news articles stressed the lack of a distinct capability that would keep competitors from duplicating any Roku strategy. Many people stressed that the platform strategy relied heavily on agreements to distribute content controlled by others, such as Netflix, Hulu, YouTube, and Amazon. On the other hand, the trend away from subscription and pay television could completely remake the content delivery landscape, and Roku was well positioned to take advantage of that shift—at the time of the IPO, 37% of US households with broadband access used the Roku platform to access content.

The appetite for IPOs was another significant uncertainty. The IPO market, as a whole, had recently shown improvement over the sluggish pace of 2016, but the performance of a few closely watched offerings was cause for alarm. Companies typically offered their shares at a discount to the expected market price and, if the stock began trading at this higher price, it could generate a substantial benefit to those who purchased at the offer price. The recent initial offering by Blue Apron Holdings, however, had ended its first trading day in June without any price increase and was trading 45% below its offer price by September.

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Keywords: IPO waves, platform strategy, share offering price