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Roku: Growing Through Structural Shifts In The Ad Landscape

May 06, 2020 8:42 AM ETRoku, Inc. (ROKU)19 Comments
The Abstract Investor profile picture
The Abstract Investor


  • Streaming adoption has accelerated in these times; Roku's April 13th Press Release saw a raised revenue guidance for Q1 while profitability estimates remained in-line.
  • The lockdowns haven't just decreased TV Ad demand, but also TV Ad Inventory value. Roku and Connected TV stand to potentially capture ad spending from this dislocation.
  • Buy Roku at an NTM EV/Sales of 10.2x for its long-term market potential. It is still undervalued despite the rally.

Roku (NASDAQ: NASDAQ:ROKU) makes for a solid growth pick based on its long-term potential. With a rapidly growing total addressable market, even faster top-line growth, and an excellent management team, there's further upside at a Fwd EV/Sales of 10.2x. The company's growth runway is extremely long and Connected TV Advertising offers immense potential, with programmatic advertising trends to help. This article is focused on discussing the pandemic-related structural shifts in the television advertising landscape and how they might influence Roku's growth trajectory.

Image Source: Q4 2019 Shareholder Letter


Roku's April 13th Press Release provided a reason for optimism, as the company guided higher revenues for Q1 and in-line profitability margins. Management remarked on the acceleration in user account growth and streaming hours on their platform which they experienced in the two weeks leading up to March 31st.

We know that cord-cutting is an inevitable trend, and we have established that Netflix (NFLX) and streaming services have enjoyed a boost out of this environment. I believe that users of traditional broadcast/cable television will conclude that they don't need to pay over a $100 a month for their Cable TV subscription, especially with the lack of live sports content on it. The current situation will continue to meaningfully accelerate cord-cutting, not just the adoption of streaming.

User engagement, accounts, and streaming hours are however one side of the coin when considering the top-line impact for Roku. The other side is whether advertisers will spend more or less than expected through their platform. The prevailing forces in the economy point to businesses cutting ad budgets significantly. To evaluate the impact on Roku, one needs to investigate the TV advertising inventory available and the transition from linear/broadcast to Connected TV advertising. I attempt to do this and draw inferences in the coming sections after positing some broad hypotheticals given the

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The Abstract Investor profile picture
I pick growth stocks that benefit from transformational trends in technology and culture globally....Such trends can be digital transformation, demand for parallel processing computing power, e-sports consumption, adoption of solar energy, and digital banking amongst others. I tend to cast a wide net in order to be opportunistic and filter down to only the best stocks for a deeper dive analysis. My investment process is fundamentals-driven, bottom-up research, and I look for companies with innovative products/solutions, strong management teams, and category leaders with wide competitive moats....I've previously worked as an analyst at a financial services consultancy catering to the asset management industry. My role was to research disruptive growth stocks across the Internet, Software, Fintech, and Semiconductor Industries and make recommendations for a hedge fund client.I hold a Masters in Applied Finance from Singapore Management University and a Masters in Engineering from Imperial College London.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (19)

Michael Clark profile picture

Target Gain
230.46<— NEXT TARGET


If it is but why is it down today after increased revenue
It’s definitely going to be an interesting report. Since we’re now six weeks into Q2, ROKU should have a good enough sense of the business trends to provide at least Q2 guidance. If they don’t provide guidance, I’ll be concerned. If they do provide guidance and it indicates that growth is not being significantly impacted, then I think the shares will run higher.
The Abstract Investor profile picture
Looking forward to it. It'll be interesting to see how the market grapples with the balance of short-term hits and long-term growth. The sell-side analysts have predicted 30% growth for FY 2020, and re-acceleration to 38-40% in FY 2021 heading into this earnings from KoyFin data. Strange times. Other stocks I track such as SQ and AYX as of today seem to be relatively unfazed with guided growth hits.

Analysts could be way off, and so could my loosely informed predictions of new revenue flowing to CTV in coming quarters. It's best to focus on the long-term rather than attempt to play swings IMO.
GreenPirate profile picture
Thanks for your well thought out article.

From what we have found, analysts est. an ESP of -$45 and Est. 39.8 million users, streaming hours 13.2 billion and: Total net revenue $307 - $317 Total gross profit $139 - $144 Net income (loss) ($60) -($55)

The question is: Should ROKU beat these estimates, will the share price rise from the $134 where it is at the moment? Is that going to be a reflection of public confidence? A response to high spending on set up of foreign operations? Or, should we consider the impact of unemployment?

I've had more of a negative view of ROKU since top executive and founder James J. Woods sold off vast amounts of options and shares over short periods of time. He also handed himself a gigantic raise of over 99%.

Also, the Coronavirus pandemic has altered the landscape and reduced investor confidence, in general. And we are not immune! As elderly Americans we are being told to be extra wary.

Given all of this, I think many people will want to hold on to a large amount of cash rather than wait out hoped for increases in share prices over the long term.

We have happily sold a percentage of shares this AM at a return of over 450%. They were the highest priced shares we had. We thought that a big negative share price number would set a limit on share price in spite of otherwise sensational data.

As to the rest, we agree with your view about taking a long-term view.
Thanks. Interesting article on a too-often-overlooked growth metric.

You're right to focus on the increasingly detailed data analytics that Roku is compiling with respect to its growing and broadening user demographic. These detailed cross-channel usage profiles are of great value to ad targeting. They will also help Roku build a data moat around its ecosystem that will protect it as one of a few leaders in OTT advertising.

But note that the value of the usage data isn't limited to ad sales. Abstracted, such data also provides insight into high-level user behavior, which aids Roku's international expansion. Such data is valuable to persuade new (local) streaming channels to join Roku, and also to part with a greater ad split or revenue share.

Moreover, these usage data acquisition trends will accelerate as streaming continues to replace linear TV, and as theatrical film releases shift to streaming releases (or as theatrical release windows are shortened in compromise).
The Abstract Investor profile picture
Good points! I agree.
GreenPirate profile picture
"Roku's performance continues to be top-line driven, as it burns cash to capture as many viewers as it can. At under 40 million active accounts, there is a far greater market to capture both domestically and internationally. Market saturation for Connected TVs won't be reached for a few more years. As of FY 2019, the company is on an accelerated growth trajectory clocking at 52.0% yoy on an LTM basis."

--As to ROKU burning cash I would hope they keep on spending on content. That's how they will grow and the advertisers will come back strong as they continue to show more numbers.

For those who are home streaming more TV than ever, they will not replace their low cost ROKU systems if the content is good. Regardless of your level of wealth, it hurts to pay for cable or satellite TV after using low cost ROKU.

But ROKU's problem, their Achilles heel, is overpaid executives, especially CEO James J. Wood, who continues to sell shares in 35,000 increments. His 99% raise to himself in 2019 leaves him with $8.3M a year.

In 2018, five ROKU executives received on average a compensation package of $5.7M, a 155% increase compared to previous year. www.execpay.org/... They are ALL getting far too much pay given that the company has not been public for very long and shares remain very volatile. Gigantic tear outs of shares will do that.

Shareholders, let them know your thoughts. US corporations are out of control in general when it comes to executive pay, and this is the kind of moment in our history when all overpaid execs should be giving back to the economy that has enriched them. Coronavirus has caused real hardship for Americans. Its time for them give something back to their users by surrendering a percentage of their salaries.

If Wood slams shareholders with another massive sell off of shares, I'm not going to stay with the company based on the enough is enough rule.
nerd_rage profile picture
How many of those 40 million "active accounts" are like me and never use Roku for any ad-based apps? I avoid anything ad based like the plague. Roku may make money from people who sign up for Netflix and Disney+ through Roku, but what if they're like me and already signed up via the companies' portals?
wantedtoretireearly profile picture
I’m like you. I’ve been a happy Roku user for probably 6 years now but have never seen an ad except for what is on the home screen. I have never watched the Roku channel. Where else are there ads on Roku they can sell?
GreenPirate profile picture
Its pretty tough to avoid all of the ads on ROKU's platform. Every time you go to the main platform there are ads. That large space around the icons for channels are filled with ads.

But let me suggest another try on ROKU's free channel. They have had some good stuff there. And unlike some free channels they don't place them so close together that there is no enjoyment in watching.

Give it a try. The latest round of content additions have been impressive, even though not all appeal to old retired folks like me.
Plain Vanilla profile picture
"What we essentially have is a reduction in the quality of broadcast/cable TV inventory and an increase in the quality of connected TV inventory due to the pandemic"

Wouldn't ctv inventory not suffer from the same problems? Why would they still hold the inventory, because of more breadth in content?

Thanks and good article.
The Abstract Investor profile picture
Breadth in content, but primarily the growing user base and increased streaming hours.
nerd_rage profile picture
Discount that 40M number by some % to account for Roku users who don't bother with the ad-based apps. I've sampled some, they are pure junk and not worth suffering through ads for. My time is worth money so I'll pay Netflix to let me dodge ads.

That's the problem ad-based platforms face, the people with money who are prime advertising targets, value their time because they have money, and the people left over watching ads like the free apps because they have no money to spare, but why bother advertising to a broke audience?
People can stream NFLX on their Roku. I feel like most people will shuffle between different streaming sites, netflix, disney+, hulu, hbo max, etc. Doesn't roku ads only appear on the Roku Channel?
GreenPirate profile picture
Thanks, we agree and will hold our ROKU shares in spite of a current extreme profit. Let's all see what happens. With ROKU it makes sense to continuously reposition with some profit taking along the way. We hold shares purchased at an optimal price while taking profits for those shares that were bought at a higher price. That way one builds a fund that is easier to hold long term and also has the benefit of cash on hand for any drops in price. It may not work forever. Nothing does.
FringDook profile picture
Long $ROKU and I agree with your strategy. It is too volatile to not take profits when it is clearly overbought. A little risky, as at some point it will go up and not come back down again.
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