Roku Ain’t Broku, Just a Tad Overvalued

Roku (NASDAQ:ROKU 126.25 -0.24%) is a name effectively synonymous with streaming. Controlling approximately 39% of the streaming box market, according to data from Parks Associates, it’s the clear leader in the sector, and when combined with Amazon Fire TV, the runner up, it accounts for almost 70% of the installed base of streaming media players in the United States.


Roku has had a whirlwind year. As a proxy for the health of the streaming market, it’s up approximately 175% since the end of January 2019 as consumers cut the cord and move towards streaming. But the company has had other kinds of ups and downs throughout the year. When Apple (NASDAQ:APPL) announced its aggressive Apple TV+ pricing, Roku’s stock plummeted almost 30% throughout September as investors wrongly thought that Apple TV+ would be a walled garden exclusive to iOS -- when in fact it’s available on all platforms.
















Invariant Theory is the study of orbits of groups.  Given one set of variables, an” invariant” does not change.  But in another set of variables, it takes on a different value that then remains unchanged within that set of variables.  The theory explains the change in algebraic expressions that change in a specified way under linear changes of variables.

Successful equity investing is most certainly NOT rocket science or the proper application of Invariant Theory. However, like Invariant Theory, an investment will likely behave in a certain manner given a certain set of variables or within the “orbit” of, say, rising GDP, falling interest rates, and a low inflationary environment.  But jolt the investment into an entirely new set of variables, like a global pandemic for example, and its behavior is likely very different.  And, like Invariant Theory, there are layers of abstract thought required to navigate the maze of information supplied by all forms of media regarding the financial “markets.”  As Einstein did, we stand on the shoulders of the giants who have successfully navigated the financial markets over time in order to assess our current set of variables and find investments that will prosper in almost any set of variables.

Each year in late February, we log on to the Berkshire Hathaway website and read the latest observations from two of those said giants: Warren Buffett and Charlie Munger. A significant portion of what we have learned over the years has come from reading the deepest thoughts of both Buffett and Munger regarding investments.

Like Buffett and Munger, we see our roles as equity managers not as stock market experts, but primarily as business analysts. While active traders and the media personalities tend to think of shares of stocks as poker chips, we see them as a collection of carefully selected businesses of which we own a portion. Of course, we do not oversee or in any way control the operations of these companies. However, we do benefit from long-term prosperity they generate.

The “orbits” or the variables that surround the financial markets have shifted tremendously throughout history.  Through wars, medical advancement, inflationary environments, political instability, terrorist attacks, technological advances, and recessions, businesses have prospered.  Buffett and Munger have always focused mainly on the potential of their businesses, not on the set of variables they are operating within or on trying to predict what the next set of variables may be.

Quite often the factors that make businesses not just successful, but great investments, can seem buried beneath the surface. In our day-to-day efforts, which are out of our client’s field of view, we spend our time furiously digging. We mine income statements, cash flow statements, and balance sheet data. We plow through conference calls which are conducted by the management teams running the businesses we own shares of. We drill into the competitors of companies we are considering, their financials, their managements and their communications as well.  Our goal, like that of Buffett and Munger, is to unearth insights regarding the status and trends associated with a company’s competitive advantages.

Even when we can identify companies with competitive strengths today, often we will see these strengths erode sooner rather than later. Some of the most heated debates in our investment discussions are over the question of “durability” when it comes to competitive strengths.  How will these competitive advantages hold up when the variables shift to a new orbit?

And the variables do indeed continue to shift.  We have moved into the orbit of “stay at home.”  We have moved into the orbit of a new administration.  We have moved into the orbit of tremendous stimulus being injected into our financial system.  The competitive advantage digging persists.

The variables will continue to shift.  For clients just getting started with Spence Asset Management in our Focus Equity Program as well as those who have been in the program for decades, the future is unknown.  The future is muddy, and it has always been that way.  Rest assured that our “shovels” are not resting. We appreciate your business, your loyalty, your patience, and your friendship.


















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The information contained herein is for informational purposes only without regard to any particular user’s investment objectives, risk tolerances or financial situation and does not constitute investment advice, nor should it be considered a solicitation or offering to investors. To determine if investment in a Separately Managed Account with Spence Asset Management is an appropriate investment for you please call 1.800.230.1840.


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