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In September 2017, a senior portfolio manager at Portland Capital Management had all her attention focused on the upcoming initial public offering (IPO) of Roku, Inc. The company had just updated its initial filing to indicate an offer price between $12 and $14, and Portland Capital Management had an opportunity to take a substantial position in that offering. She saw the upside potential in Roku’s shift from hardware-related revenue streams (player sales) to platform-related revenue streams (advertising and content purchases made on the platform). But she was also well aware of the riskiness of this strategy and the uncertain state of IPO markets at that time. This case has been used successfully as an introduction to IPOs at the MBA level, but it is rich enough to serve as a second case after the topic has been introduced, particularly if the instructor wishes to focus on elements related to ownership structure, selection of comparables, or the IPO process. The analytics are sufficiently clear and major revenue assumptions already forecasted, so it can be used in undergraduate courses as well. The case does require that students have some familiarity with enterprise valuation; otherwise they may not understand the required analysis.
The case can be used to pursue the following objectives: (1) to introduce students to the IPO process, with a focus on the concept of underpricing and the benefits and costs of going public, including control issues; (2) to model cash flows for a technology company where the underlying value drivers (users and revenue per user in this case) are explicitly stated and explored, and where the company is undergoing a dramatic shift in strategy; (3) to build skills in enterprise valuation, including the calculation of cash flows, the use of both long-term growth rates and multiples for terminal values, and the determination of a discount rate from the cost of capital of comparable firms; (4) to study the use of pre-money or post-money shares in a valuation, and the implications of potential dilution; (5) to explore the concept of dual-class shares and changes in ownership structure around IPO; (6) to explore the link between strategy and pricing, with attention to the use of sensitivity analysis; and (7) to discuss the changing landscape for content creation and delivery in the late 2010s.