Streaming-TV platform Roku (NASDAQ:ROKU) is a perfect example of a millionaire-maker stock. The company’s 2017 initial public offering (IPO) priced at just $14 per share. It’s trading at $415 per share as of this writing, up over 27 times in value in less than four years. A mere $36,000 investment at the IPO price would be worth about $1 million now. If only you had a DeLorean equipped with a flux capacitor, right?
We can’t go back in time to snag Roku stock on the cheap. But don’t think that you’ve completely missed the boat with this millionaire-maker stock. It’s not too late to buy Roku.
This major shift is ongoing
In 2020, Roku signed up more new users than ever. In all, it gained 14.3 million new active accounts during the year, taking its total active accounts over 51 million. The reason for this impressive growth is simple: People are tired of TV options like cable and satellite and are switching to streaming. Roku is a platform enabling the shift.
This shift isn’t over by a long shot. According to a January report from market researcher Parks Associates, 43% of people still paying for traditional TV plan to switch to streaming in the coming year. Expect Roku to be a primary beneficiary of this massive pay-TV exodus. Its hardware devices are popular, and it currently estimates that its software runs 38% of smart TVs sold in the U.S., making it the market-share leader.
In short, Roku’s 39% year-over-year growth in active accounts was impressive. But things are shaping up nicely in the coming year and beyond as well.
Ad revenue is still gaining traction
Roku’s revenue is divided into two segments: player and platform. Player revenue is generated by low-margin hardware sales and is growing modestly. But high-margin platform revenue was up 71% year over year in 2020, and 81% year over year in the fourth quarter alone.
Platform-segment revenue includes several items, one of which is advertising, which may be Roku’s fastest-growing revenue driver. Video-ad impressions more than doubled in the fourth quarter, and advertisers are spending more on average than in times past. The reason is simple: Roku has an engaged, growing audience. And streaming allows for more-targeted ads, leading to better results for advertisers.
It’s a trend that should only continue. In Roku’s fourth-quarter letter to shareholders, management said that ad companies are increasing their commitments for 2021. This comes after the top six collectively doubled their spending in 2020. It strongly suggests they believe their investments with Roku are paying off, boding very well for future spending.
And let’s not forget about The Roku Channel. In the fourth quarter, viewership for The Roku Channel more than doubled from the previous year, outpacing overall user growth. This channel can be viewed on Roku’s platform but also on web browsers and even on competitor Amazon‘s streaming-TV service.
All of this content is ad-supported, and now Roku is ready to take it to the next level. It purchased original content from Quibi to make available on its channel. This and future exclusive content might drive growth for The Roku Channel, boosting ad revenue even more.
Don’t forget the rest of the world
Roku is becoming ubiquitous domestically, but around the world, the company is just scratching the surface. In countries like Brazil and Mexico, it’s making deals with local TV brands to be the operating system for various smart TVs. Long term, it will look to grow engagement just as it has in the U.S., which could be a huge tailwind in a few years.
It’s not too late
As we’ve seen, Roku still has plenty of room for growth as people continue to switch to streaming, advertisers redirect budgets to platforms like Roku, and Roku expands worldwide. I doubt the stock will be a 27-bagger over the next four years, as it was the past four, but I still think it can beat the market.
If there’s one thing to be concerned about in the near term, it’s user engagement. Steaming hours increased 55% year over year while Roku users spent more time stuck at home because of the pandemic. That should decelerate in 2021, and I wouldn’t be surprised if Wall Street responds negatively when it happens. But I believe growth in the other areas we’ve seen more than justifies buying Roku stock anyway.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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