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Why Roku Stock Took a Hit Tuesday

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 was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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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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