Roku (ROKU) is a name that has more than tripled in 2019. With it being a slow news day, we thought this was a good time to provide an update on the company.
You should read our December report for full details, but the crux of the story is that Roku is a play on the shift to streaming TV. Roku used to make most of its money selling hardware (Roku players, Roku TVs), but now most of its growth is coming from platform revenue. Two-thirds of its platform segment revenue comes from advertising while the other third derives from content distribution fees -- Roku gets a slice when you subscribe to Netflix via a Roku TV.
The advertising component is really the crown jewel of the story. Advertisements on streaming TVs are still in their super early days in terms of development. The regular TV ad business in the US is a $70 bln business. The vast majority of those ad dollars still centers on linear TVs, but more and more is going toward streaming. Roku sees huge upside in its ad business as that trend grows.
Roku posted strong back-to-back earnings results in Q4 and Q1. Of note, Roku said in its Q1 report in early May that it estimates that Roku TVs sold by its OEM partners accounted for more than one-in-three smart TVs sold in the US in Q1, as Roku gained significant market share. That's an impressive chunk of the market.
Roku platform engagement is also going up as per household streaming grew to an average of roughly 3.5 hours a day per active account, representing nearly half of average US per-household daily viewing, according to the company. Also, Roku said that it's excited about the growth of The Roku Channel, which offers ad-supported content, live programming, and Premium Subscriptions (HBO, Showtime, etc.), all through a single login and one bill.
Some investors have concerns regarding the competitive front. There have been reports of Apple teaming up with Samsung, LG, and Vizio, and Amazon has also been looking more into this area. The potential entrance of new big players in the space is definitely something to keep an eye on, but Roku's dominant market share should help it to defend its turf.
Overall, we remain fans of the story, as there are still a lot of ad dollars moving to streaming. Also, this company was long thought of as a hardware play, but that's not really the case anymore. It's much more of a play on streaming ads, particularly with its popular Roku Channel and premium subscription delivery. Also, the valuation is not that bad for a tech name, with a price/sales ratio of 11x. Looking ahead, Roku is expected to report Q2 results in early August.