Wall Street’s huge welcome for Roku Inc.’s initial public offering is reminiscent of its embrace of the once-hot IPOs of GoPro and Fitbit, and investors would be wise to step back and look at both of those companies are now faring.
GoPro Inc. GPRO, -4.09% , which went public in 2014 and Fitbit Inc., FIT, +0.72% which came to market in 2015, saw their shares soar after their initial stock market debuts, and for the first few months of trading, but are now priced well-below those highs. Both of these companies make a specific hardware product with low profit-margins, but have grand schemes to expand beyond their hardware horizons.
In GoPro’s case, the developer of sports cameras spent millions of dollars creating an entertainment business. Its move into content was to be based on the extreme sports videos shot from GoPro’s cameras by its customers, including professional athletes and celebrities. But last year, GoPro closed it down, leading to layoffs and restructuring charges. Nowadays, GoPro, which came to market at $24 a share, trades around $11.04, a plunge of about 70%, while the Dow Jones Industrial Average DJIA, +0.11% is up 32% over the same period.
Meanwhile, Fitbit earlier this year announced a big move into software, as it tries to create an ecosystem, a la Apple Inc. AAPL, +0.55% At the Consumer Electronics Show in January, Fitbit unveiled a social feed for Fitbit users, telling MarketWatch in an interview that users of its wearable fitness trackers were inspired by social motivation.
This summer, Fitbit announced the Fitbit Ionic, a smartwatch to compete with the Apple Watch and to compensate for the flagging sales of its older devices. The Fitbit smartwatch will also rely upon an ecosystem of software apps, but it was criticized at launch for, among other issues, the small number of apps available. Shares of Fitbit have tumbled about 78% from its IPO, while the Dow is up about 25% over the same period.
Roku appears to be following a similar path to TiVo Corp. TIVO, +2.06% , the pioneering television set-top storage box, which has morphed into a service able to stream video from sites like NFLX, +0.36% and Amazon.com AMZN, +0.52%
TiVo has become more focused on becoming a platform company, as sales of its TiVo boxes declined. Last year, it merged with Rovi in a $1.1 billion deal , and is clearly de-emphasizing the hardware aspect of its business. TiVo executives told investors at a meeting in May that it is “hardware agnostic” and it is sees itself as a software solution.
Roku said in its regulatory filings that sales of its Roku player slipped 2% to $117.3 million in the first six months of 2017, and that it’s lowering average selling prices for its hardware. But its platform revenue soared 91% to $43.1 million for the same period, with a much lower cost of sales, and a higher profit.
Becoming more of a software-based company will not be an easy task for Roku, as evidenced by the setbacks at GoPro, Fitbit and TiVo. Roku believes it has it all figured out, and indeed it has a good start. But investors need to remember that not every company can shift from a hardware focus without any pain.