Digital streaming business Roku has soared in its public debut.
After pricing its IPO Wednesday at $14 per share, Roku finished its first day of trading at $23.50, up nearly 68 percent. And by the end of Friday, Roku closed at $26.54, or up 90 percent in less than 48 hours. The company is now valued at about $2.6 billion.
So this must be great news for the company, right? Well, sort of. Roku's team is probably pleased that the stock market likes it so far, a possible omen for the future.
But it also means that the company could have sold shares for way more. Roku priced its IPO at $14 per share, raising about $219 million. If the IPO were priced at $22, Roku would have raised $345 million and new investors would have still made quick gains over 20 percent. Bankers usually recommend pricing at a 20-30 percent discount so the company makes a good first impression on the stock market. Depending on the share performance in the coming months, it will be more apparent whether this was a $125 million mistake.
Investors are buying Roku, in part because they're bullish on the cord-cutting space in general. Millennials are shunning the traditional cable TV model and are opting to watch more digital content.
Roku has also managed to carve out a significant stake in the United States, despite competition from Amazon Fire TV Stick, Apple TV and Google ChromeCast. It generates a lot of its revenue from hardware devices and also from licensing its operating systems to smart TV manufacturers.
The company brought in $399 million in revenue last year, but was unprofitable with losses of $43 million. 2015 revenue was $320 million and the company was in the red for $38 million. Founder and CEO Anthony Wood told TechCrunch on Thursday that “revenue growth has been modest because we’ve been driving down prices.” Low-priced competition inspired the company to introduce the $29 Roku Express device, which Wood calls a “huge success.”
Wood pointed to the company's platform business as a growth opportunity for the business. This includes advertising revenue generated from streaming content from Amazon, Hulu, Netflix and YouTube. It also generates revenue from content distribution fees.
Roku previously raised more than $200 million in venture funding. Menlo Ventures was the first investor and largest stakeholder, owning 35.3 percent of the company leading into the IPO.