(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX and GOOGL.)

Roku Inc. (ROKU) shares are falling by nearly 16 percent after the company posted middling fourth-quarter results given its steep $4.2 billion market cap. 

Roku's results spotlight a company facing fierce competition on its streaming media device, while its advertising platform may not be gaining traction fast enough. Compared to a company like Apple Inc. (AAPL), a hardware company that puts users on an ecosystem similar to that of an iPhone, Roku is nearly 40 percent overvalued. (See also: How to Tell If a Stock Is Overvalued or Undervalued.)

Netflix Inc. (NFLX) and Roku are not comparable, as Netflix's valuation should not be used to justify Roku's, as some contend. Netflix is a subscription-based model where a subscriber pays a monthly fee to access Netflix original content. 

Netflix is a platform-agnostic product that can be viewed on any device from anywhere, which allows Netflix to trade at a higher multiple to Roku. In fact, Netflix which created the Roku player, spun off Roku because it feared a streaming player would be viewed as competition to other device makers, impairing the distribution of Netflix content. 

ROKU Chart

ROKU data by YCharts

Overvalued 

At a valuation similar to that of Apple, Roku would be valued at only $2.8 billion, a decline of 38 percent from its current valuation. Apple trades at 3.2 times 2019 sales estimates of $273.83 billion, while Roku currently trades at 4.9 times 2019 sales estimates of $862.9 million. 

But there is a chance those sales estimates may be too high, which could make the company worth even less, because Roku is seeing a decline in player revenue, and its advertising platform may not be growing fast enough to make up for it. 

ROKU Chart

ROKU data by YCharts

Slumping Sales

In an attempt to gain market share, Roku says its primary focus is on selling players to increase active accounts, and as a result, the company is not focused on maximizing hardware revenue or gross profit. This lack of focus has resulted in the average selling price of its devices to fall 14 percent. 

Despite the slashed prices – which should have translated to higher sales volume – Roku sales dwindled. Sales for Roku's media device fell in the latest quarter by over 7 percent from a year ago to $102.8 million. This underscores how steep the competition in the market is for these streaming devices – and from much more prominent rivals such as Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), and Apple. 

Not Growing Fast Enough

Roku depends too much for its revenue growth on advertising and its licensing platform, which saw year-over-year growth of 129 percent to $85.4 million. But concerns emerge, as the unit shrank to represent only 45.3 percent of total sales, from 46.1 percent in the second and third quarters. 

Profit margins also fell in the latest quarter by roughly 300 basis points to 74.6 percent, while revenue per user growth slowed to only to 8.6 percent sequentially from 13 percent. 

If Roku starts developing original content and charges a monthly subscription fee, then the model changes. But for now the company has no plans to do that, which makes Roku more like Apple, not Netflix. And for Roku, that is not a winning strategy. (See also: Roku Shares Crash on Lackluster Guidance.)

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.