Why Roku Stock Took a Hit Tuesday

The Street seems to think that Apple’s affordable pricing for its new streaming-TV service could pose a threat. But is the Street wrong?

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What happened

Shares of Roku (NASDAQ: ROKU) were slammed on Tuesday, sliding 10.5% by the time the market closed.

While some of this decline was likely due to a continued sell-off in many high-growth software stocks this week, there’s another reason for the tech stock‘s sharp drop on Tuesday: the competitive pricing of the new streaming service from Apple (NASDAQ: AAPL).

So what

On Tuesday morning, during Apple’s annual September product launch, the company kicked off with details on its upcoming services: Apple Arcade and Apple TV+. Each service will cost $4.99 a month. Furthermore, these subscriptions will support up to six family members. Specifically, the Apple TV+ streaming-TV service will also be free for one year for any customers who purchase a new iPhone, iPad, Apple TV, iPod touch, or Mac.

Apple TV+ launches Nov. 1, and some investors may believe the aggressively priced offering will create competition for companies in the streaming-TV business, like Roku. Shares of Netflix (NASDAQ: NFLX) also fell after Apple announced the pricing of its new service, likely because of these concerns. But Netflix finished the day down a more modest 2.2%.

Now what

Investors should keep in mind that Roku benefits from growing competition in streaming TV; it’s not hurt by it. The company primarily makes money from taking a share of subscriptions and ads from third-party streaming services on its platform. Indeed, Roku will get a share of Apple TV+ subscriptions on its platform, as Roku is one of the over-the-top streaming devices the service will be available on.

While Roku does have a streaming service called the Roku Channel, the service is essentially an aggregator of ad-supported content and premium subscriptions to services like Apple TV+. Roku does not make original content and thus doesn’t sell subscriptions to any services with original content.

More affordable pricing for Apple TV+ will lead to more subscribers — and ultimately more engagement — on the Roku platform.

Is the Street misreading how Apple TV+ could impact Roku?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Netflix, and Roku. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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