Stock Report – Roku

Roku: Building enviable scale as a valued streaming aggregator


One of the leading tech trends in recent time has been the rise of video and audio streaming in households all across the world. Viewers have been abandoning traditional television in favour of on-demand services that cater to their particular content needs. Most people associate entertainment streaming with companies like Netflix (NFLX), but Roku (ROKU) has created its own niche. Founded in 2002, the company adopts a different strategy to some of the other incumbents.

Roku manufactures digital media set-top box players to stream video and audio. This hardware and open-software solution includes on-demand and live content. Apart from its own steaming ‘channel’, content comes from thousands of channel partners including streaming services like Netflix, Hulu and Amazon Video. Roku also licenses some of its hardware to third parties. Another distinction is that the company operates an advertising business, allowing advertisers to directly target Roku’s users.

In late 2017 the California-based business listed on the NASDAQ with a valuation of US$1.3bn after raising capital at US$14 per share. Within three months the share price surged above US$50. This year has marked a transformational period for the company, with its stock rising more than 330%. With a lot more to play out in this growth story, this could be just the beginning.


An aggregator leveraging a growing theme

Roku’s position as a streaming entertainment aggregator affords it a rewarding position to take advantage of prevailing industry trends. Its devices account for 39% of installed streaming media players in the US. As an open-software platform, it provides access to a rapidly growing number of entertainment channels, meaning channel partners have become dependent on Roku to reach users.

This will include eagerly awaited services from Disney+ and Apple TV+ over the coming months. Roku will have exposure to their expected growth and can even capture royalties for its customers subscribing to such services. Typically, Roku negotiates a 20-30% revenue share arrangement with over-the-top service providers looking to reach Roku’s users. More and more media networks look poised to transition from cable to streaming as well.

While the business has its own channel (The Roku Channel), it isn’t dependent on subscription fees as the content is free. Nonetheless, Roku still plans to invest heavily in the coming quarters to enhance its content package. With a higher population of active users turning to streaming entertainment, leverage to the best of both worlds means that the company can capture growth from multiple sources, including the budget and premium ends of the market.


Momentum building for platform revenue

Whereas low-margin player revenue (hardware sales) was once the company’s predominant source of income, that has been replaced by high-margin platform revenue. This includes fees from advertisers, streaming service providers, content publishers and TV manufacturers.

Nevertheless, device sales have still performed strongly, rising 24% in the most recent report. The real driver of growth, however, is platform revenue, which climbed 86% year-on-year to US$167.7m and now forms 67% of all revenue. This was instrumental in seeing total revenue growth accelerate against the corresponding quarter last year – a result of 59%, versus results of 51% and 45% in the two preceding quarters.

With the number of channels available through Roku increasing, platform revenue has a strong tailwind behind it. The company’s investment towards its own content line-up is also supported by advertising revenue, which provides a solid strategic foundation. On top of this, Roku has licensed its technology to brands like Hisense, Hitachi, Sharp and TCL among others to provide an integrated streaming interface for TVs. This will increase market penetration and make it easier for new users to sign up to streaming services, thus providing Roku more exposure to revenue growth.


Accelerating account engagement

In its most recent results, the business reported active accounts grew 39% from a year prior to 30.5m. In the quarter alone, 1.4m new accounts were added. Looking further into engagement levels, it is worth noting that streaming through Roku has risen 72% over the same timeframe to reaching a staggering 9.4bn hours.

The above consumption numbers translate to each account using Roku’s streaming platform an average of 3.4 hours per day, compared with 2.7 hours per day last year. There is still considerable impetus for this to continue growing as more service providers partner with Roku.

Roku has cemented its position and, in some respects, become irreplaceable for both households and streaming service providers. The average revenue per account has risen 27% in the last 12 months to an annual run rate of US$21.06, including a $2 jump in the second quarter. As the company builds additional scale and expands its audience reach it will also give it the opportunity to optimise its targeted advertising capabilities.


A formidable market position

Roku has established itself as a dominant business among media streaming providers. It functions as an aggregator to bring content to users from third-party service operators, with the number of providers coming to the market growing considerably.

In addition to royalties it generates from subscription-based operators, the company funds its own free content channel through targeted advertising revenue. Hardware sales continue to expand at a strong rate, while partnerships with TV brands will aid market penetration and increase Roku’s accessibility to earn other revenue.

Finally, account metrics are all trending in a favourable direction for Roku, with significant growth thus far likely to continue for some time yet on account of industry trends.