Is Roku Inc. (ROKU) an excellent investment choice?

Roku gained 39% in the first half of 2021, more than double the S&P 500. Since 2015, Roku’s platform revenue or subscription fee and advertising revenue has grown 32×9.

Despite a 300% gain on our investment so far, Roku’s flywheel is just starting to take shape and we’re excited to hold the stock.

Roku Q1 2021 Shareholder Letter: “According to e-Marketer, Americans will spend on average more time streaming TV than all major social media platforms combined: 3x Facebook, 2x YouTube and about 2.5x Instagram, TikTok and Snapchat Combined And, like these leading social platforms, Roku has deep and direct relationships with consumers who are not dependent on third-party identifiers and cookies. “

Over the past year, the platform’s revenue has doubled and streaming hours per user have increased by 38%. With subscriber revenue of just $ 2.67 per month for 53.6 million users (Q1 2021), we believe there is a substantial monetization gap to close as TV advertising budgets catch up. consumer transition from cable television to streaming.

Our baseline scenario is that the Average Revenue Per User (ARPU) in North America will continue to grow much faster than new subscribers as Roku reap the economic benefits of its ad-supported free TV model.

Longer term, we believe that the combination of Roku’s growing consumer value proposition, continued acquisition of ad-accepted TV content, and advancements in ad technology will lead to ARPU and return on capital higher than what is possible in pay TV models.

Roku was founded in 2008 during the financial crisis and its reading material ignited the spark that then catapulted streaming TV from a controversial niche that few believed in mass market adoption. The hardware is Roku’s “customer acquisition cost” or how it integrates subscribers, publishers, and advertisers into the platform.

For years, the investment community misunderstood Roku as a computer hardware company and dismissed the idea that the ad-supported free streaming TV market could be bigger than paid subscription models. after cutting the cord.

Roku Q1 2021 Shareholder Letter: “More generally, the global secular shift to streaming continues, and Roku benefits from our cutting edge technology and scale. “In the first quarter, the total number of TV streaming ad impressions delivered through OneView nearly tripled year over year, while the total number of impressions on the Roku platform (sold by Roku or his editors) has more than tripled. The transition from cable TV to streaming has rewritten old models in the industry, and Roku is now a centerpiece in the battle for your living room’s future economy.

In the first quarter of 2021, Roku reported 18.3 billion hours of streaming on its platform, an average of 6.1 billion hours per month. There are over 25,000 apps on the Roku platform, and consumers need an easy way to organize, find, and discover content.

Like Spotify, Roku’s position as an aggregator becomes more valuable as streaming content explodes and advertisers vie for a limited number of eyeballs for shows, movies, and games.

Letter to Roku Q1 2021 Shareholders: “With so much exceptional content made available on the Roku platform, publishers are investing heavily in promotion and leveraging our industry-leading performance-driven marketing tools to grow their audience of TV streaming …

… As a result, media and entertainment advertising (which includes what we traditionally call our audience development business, grew faster than the overall platform in the first quarter of 2021. As a platform- The # 1 TV streaming form in the United States (based on streaming hours – Hypothesis Group as of April 2021), Roku will continue to benefit from the ongoing centuries-old transition of consumers and content providers to streaming. “

Roku’s relentless drive to reinvent a superior customer experience in ad-supported free TV has resulted in strong brand loyalty, high-quality smart TVs that can be sold at record prices, and a solid return on investment for its partners. advertisers and publishers.

Roku Q1 2021 Shareholder Letter: “Advertisers continued to track audiences and shift budgets to TV streaming as Roku’s monetized video ad impressions more than doubled year over year. ..

… Our advertising technology enables advertisers to accurately reach any subset of our large and growing audience, which in turn improves the ROI for every dollar a brand spends with us. For example, the recent Home Chef campaign showed that Roku generated a 2.4-fold return on ad spend. “

THE ROKU CHANNEL FLYWHEEL

The Roku Channel might be the company’s most underrated asset and is driving the next phase of Roku’s flywheel.

The Roku Channel is an ad-supported free content app launched in 2017 and can be watched on any mobile device such as a phone, tablet, or smart TV. The channel is designed to become the go-to app for content once watched on cable TV and bridges the gap between top movies and shows on subscription apps like Netflix, Disney, HBO, Discovery Channel, etc. .

One of the important strategic milestones in the history of Roku has been to leverage its position with the big content owners and to offer better terms on the Roku platform in exchange for exclusive access to certain content. for use on Roku’s own streaming channel – the Roku Channel.

For example, Peacock may license a few older shows to The Roku Channel in exchange for the right to sell a higher percentage of ad inventory on its own app when watched on the Roku platform.

Roku controls 100% of the ad inventory inside the Roku Channel, making it possible to track audiences in a more granular way, which is not always possible in third-party apps on the Roku platform.

In the ad-supported model, revenue per user is linked to content consumption. The more its users watch the channel, the more money Roku can make from advertising.

The Channel stimulates consumption by acquiring traditional TV content not sought after by Netflix, Amazon or Apple. The channel’s first content deal was the acquisition of the assets of Quibi and has since acquired niche reality shows and comedies created for the sale of advertising.

The Roku channel’s content strategy also provides a significant advantage over less developed operating systems offered by TV manufacturers. Finally, the channel is also helping Roku to diversify its revenue from the commissions it earns on the big Roku platform super apps like Netflix and Disney.

Letter to Roku Q1 2021 Shareholders: “On The Roku Channel, we had another record quarter of growth, reaching US households with around 70 million people. Account reach and streaming hours more than doubled year over year – a growth rate that is surpassed twice as fast as the overall Roku platform …

… This demonstrates the power of The Roku Channel’s flywheel: easy access to high-appeal content attracts viewers, this viewer engagement attracts advertisers, and advertiser spending in turn allows us to invest in more content …

… This flywheel allows us to be more creative and expansive in finding content suitable for an AVOD (Video On Demand) business model, and we anticipate that our investment in content will continue to be commensurate with the scale and growth trajectory of The Roku Channel. “

“In the first quarter, over 85% of the audience of adults aged 18 to 49 broadcast on The Roku Channel was not duplicated with traditional television. With our industry-leading scale and highly efficient monetization capabilities, The Roku Channel is also an increasingly attractive place for content owners. to reach streaming audiences through advertising and subscription models. “

We’re excited about what Andy Wood and his team at Roku are building and believe the market for ad-supported free streaming TV is likely to grow faster than subscription models.

People love free content when the advertising is relevant to them and the advertising load is not excessive. The ad-supported free model also translates well around the world and allows Roku to grow quickly in high growth countries like any internet business.

In May, Seth and I interviewed Tal Chalozin, co-founder of Innovid Inc. about improving the technology infrastructure reshaping what’s possible in ad-supported streaming TV. “


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