Multi Baggers in The Making: Roku
Top-line Numbers:
· Expected growth in FY21: 55-60% YoY to $2.8+ Billion
· Net income positive: Yes
· Target enterprise value and valuation to add: Less than $41 Billion or under 15x EV/S
The Business:
Roku is a leading (if not the best) streaming service provider and operates two different business segments, their platform segment and their player segment. They currently anticipate on their platform segment offering the largest opportunity for growth in the future years. This is predominately composed of digital advertising, content distribution services, subscription/transaction revenue, premium subscriptions, billing services, sale of branded channel remote controls and licensing arrangements with service operators and TV brands. Their player segment, which is their slowest growth, operates as the hardware component to the business.
After reviewing their Q2 financials, I noticed that there were a few things that really stuck out to me. Revenue breakdown from Q2 FY21:
Q2 YoY platform growth is completely flat, but you continue to see momentum in ARPU (average revenue per user). This tells me that TV and other hardware sales are a stagnating, mature, aspect to their business but they’re still find new ways to make money. This is most likely from advertising efforts as well as content service revenue. Basically, they’re really good at monetizing their base while still keeping them happy. Let’s talk about their business model.
· *Note* I did see that their streaming hours decreased and think this has little to do outside macro trends on the “reopening” from COVID restrictions. I do anticipate on this improving next quarter.
The best way to think about Roku as a whole, it’s the premier streaming services provider from top to bottom. Every facet of the streaming industry, they seem to have a stake in it. However, there are very important high growth business functions that will continue to enable the business growth: The Roku channel and the advertising business, OneView.
The Roku channel has some pretty incredible synergies that creates a clear flywheel. In comparison to their top competitor, Netflix, they have a distinct competitive advantage where they control the advertising side, the hardware, the TV operating system, and the audience that can enroll in RokuTV Subscriptions. I believe this is important competitive advantage due to brand familiarity and brand trust, one would be more inclined to use RokuTV that goes with their RokuTV operating system and their Roku players (hardware). They’ve seen exponential growth in this segment and plan on offering “Roku Originals” to further growth, which will be TV shows only native to Roku.
OneView is a demand side platform owned by Roku, with a distinct competitive advantage against its competition due to the flywheel effect mentioned above. They don’t only exclusively work within the Roku ecosystem, as they help small and large businesses, but OneView is the best way to reach Roku users. Due to advertising trends shifting away from the cookie, consumer data will become more and more important which is exactly what Roku has access to due to Roku Subscriptions and additional data sources it collects within its ecosystem. This will most likely continue to be a major growth driver in the business for years to come.
Growth Potential:
Roku is clearly a top competitor in the massive markets in advertising and streaming. Past results continue to prove this, especially with the below image.
The entire streaming industry really sputtered in Q2 FY21, most likely from the re-opening, but Roku still found a way to grow YoY viewing hours. It’s pretty easy to see they’re cutting into other business streaming hours.
They have a clear growth path moving forward for continued exponential growth. When looking forward for this business, international growth is a major driver where they are #1 and #2 in Canada and Mexico, respectively, from a TV operating system perspective and hardware sales. I expect this dominant growth to continue into other countries. More notably, Germany is first on their list in Europe. They also benefit from major secular tailwinds in the global streaming market which is expected to continue growing 21% CAGR until 2028 and 17.2% CAGR until 2027 in the digital advertising market. There’s still major opportunity, especially if they compete and take market share from The Trade Desk and Netflix which are large players in digital advertising and streaming services.
There seems to be an unusual divide with Roku between the Bull’s and the Bears. I listen to the Bear argument of slowing growth, international expansion hiccups, competition, etc. However, I cannot doubt this leadership team’s ability to innovate and create new product opportunities long term. You never know what they’re going to come out with next. I believe their next move may be something along the lines of an e-commerce streaming service company, stay tuned for this one. Remember, after all, they were just a device company at one point.
Summary:
I currently own Roku, and don’t plan on selling any time soon. The latest earnings have given me substantial confidence and if it sells off, I will add to my existing position. I understand the risk factors which I believe are primarily international expansion risk (which is also a key attribute to the bull case) and competitive risk. Because they compete against tech super giants such as Google, Netflix and The Trade Desk I do think they’ll have to continue to innovate and execute at a high rate. They’ve proven they can, but this execution risk will always remain until they become a tech giant themself. I wouldn’t own this stock if I didn’t think it will 10x from here and do believe there’s a strong chance at this in the future.