Last year was full of events Year (NASDAQ: ROKU). In the face of unprecedented and widespread shutdowns and home stay orders, consumers have accelerated their adoption of video streaming – a trend that has reached several of Roku’s strengths. Its business gains have increased its stock by almost 300% in the last 12 months.
However, with the end of the pandemic on the horizon, investors are rightly wondering if the upward growth of the stock has followed its course and if tougher days could be available for the streaming platform. However, even if the recovery gains steam, Roku has several advantages that should keep its growth story intact for years to come.
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A common misconception
While Roku is known for the streaming boxes and dongles that bear its name, they are largely sold at or near cost to expand the growing base of installed devices. This strategy is one of the secrets of the company’s success, but it is not the only way it develops its ecosystem.
A few years ago, Roku created a state-of-the-art operating system (OS) that it licenses to connected TV manufacturers. Because the operating system was built from the ground up specifically for smart TVs, it does not suffer from the types of limitations that affect rival systems that have been developed by reusing mobile device operating systems. The Roku operating system is above the competition and is the best choice of smart TV manufacturers in North America. In fact, Roku is the number 1 smart operating system that sells on the continent, powering 38% of TVs sold in the US and 31% of those sold in Canada. The company’s international expansion has just begun, so it has another great untapped opportunity ahead.
Roku is now the industry leader with over 51.2 million active accounts. To put this number in context, Amazon (NASDAQ: AMZN) Fire TV closed 2020 with 50 million viewers. Perhaps more importantly, Roku’s growth is accelerating at a time when Amazon is slowing down. Roku’s active accounts grew 39% year-over-year, while Amazon’s growth fell to just 25%. It’s a rare company that can go head-to-head with Amazon and get to the top.
Everything “announcements” up
Roku gets his income from two segments. The player segment consists of its hardware – boxes and dongles. Then there’s the platform segment, which includes digital advertising, the Roku channel, and the aforementioned Roku operating system licensing. This segment now accounts for most of the company’s assets.
With more than 51 million active accounts, Roku has a treasure trove of data for viewers to help generate targeted ads on its platform. The potential growth in this segment should not be underestimated. Currently, more than 29% of TV viewing takes place on streaming services, but only 3% of TV advertising budgets are spent on them. As those advertising dollars migrate to streaming platforms, Roku is positioned to enjoy the unexpected.
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That’s not all. The company hosts about 10,000 channels on its platform and earns money from all this. When a viewer signs up for a subscription streaming service, such as Netflix or Disney+, Roku receives a reduction in subscription fees. However, most streaming channels are ad-supported services, which is why Roku really benefits. The company ends up selling 30% of the ads that appear on the streamed channels on its platform, using the data it collects to direct these ads to the right viewers – and it collects revenue.
Roku has other primary real estate for its digital advertising. The company gets all the revenue from the ads that appear on the home screen and on The Roku Channel, its own streaming video channel. The company also communicates regularly with active account holders via email, highlighting services and scheduling that may be of interest, extracting additional revenue from service providers.
Expanding its advertising ecosystem
While Roku already has an expanded advertising ecosystem, the company has recently made several moves to expand it even further. Last month, he bought Nielsen Holdings“Advanced video advertising activity, which allows the company to digitally replace television advertising with its own digital advertising. Roku has also agreed to integrate Nielsen rating measuring instruments into its platform, which will further increase the accuracy of its targeted advertising.
Just three weeks later, Roku launched a branded studio designed to help marketers think bigger and grow their commercials beyond traditional 30-second TV commercials. It will create short-lived TV programs commissioned by advertisers, develop interactive video ads and generate other branded content that will appear on the Roku channel. It is worth noting that watching for The Roku Channel is growing almost twice as fast as the company’s overall growth. It now reaches about 63 million people in the United States, growing by more than 100% year on year. This presents the company with yet another profitable opportunity.
Show me the money
None of this would matter if it did not lead to higher revenues and higher profits. The company’s revenues increased by 58% in Q4, and for the second consecutive quarter, Roku made a profit. More importantly, revenues in the platforms segment increased by 81%, achieving 73% of total sales.
The company’s ability to monetize its platform continues to grow, as evidenced by the average revenue per user, which increased by 24% year on year. This was due to the strong and growing involvement of users. Streaming hours increased by 55% to 17 billion, exceeding the growth of users. This illustrates that existing viewers spend more time than ever watching videos on Roku – currently, the average is about 3.6 hours on active account per day.
Image source: Getty Images.
Fine print
There is no doubt that 2020 has marked a turning point for video streaming. Each of the major streaming services has grown more impressively than it might otherwise have as a result of the pandemic. Now, some investors are wondering if the nation’s expected return to “normal” could prevent further adoption of the flow. Sure, Roku’s growth could slow down somewhat, but viewers cut the cable and abandoned traditional linear television before COVID-19 raised its ugly head.
There are also concerns about the price of Roku’s sticker. The stock is certainly not cheap based on traditional valuation values, with a price-to-sales ratio of 26 – when a ratio of 1 to 2 is usually considered good.
That being said, Roku is firmly rooted in the intersection of two secular trends that will continue to gain momentum – video streaming and digital advertising. Taken in the context of the company’s solid results and its large and growing opportunity, Roku shares remain a solid buy.
This article is the opinion of the writer, who may not agree with the position of “official” recommendation of a premium Motley Fool consulting service. We are motley! Asking an investment thesis – even one of our own – helps us all think critically about investments and make decisions that help us become smarter, happier and richer.