Throughout a tumultuous 2020, Roku was one of a handful of companies that bucked the broader trend and saw its stock appreciate in value. As people spent most of their time at home, Roku surged nearly 150% last year, far exceeding the S&P 500’s gain of 16%.
Then after more than a year, COVID-19 restrictions were beginning to ease as vaccination rates ratcheted higher. During the first half of Q2, it appeared as if the world was on the reopening fast track, and that put some pressure on previous COVID beneficiaries, including streaming-centric companies Roku and Netflix.
So far in 2021, Roku stock is up a modest 12%, trailing the broader market’s 22% gain. Roku’s Q2 financial results were solid, but the stock was punished after reporting a decline in streaming viewership, a key metric for the company.
There was a lot of pent-up demand for travel and dining out, according to Roku CEO Anthony Wood. Consumers were seeking entertainment outside of their homes, which was causing a decline in TV viewership more broadly, he said.
There certainly will be challenges for Roku if the decline in streaming viewership persists, but with the company’s valuation back below $50 billion and the stock under $400 per share, perhaps investors are underappreciating Roku's long-term value in the media landscape.
In the second quarter, Roku saw streaming viewership take a rather significant dip lower. However, the company also had very healthy topline growth thanks in part to strength in advertising. Overall revenue jumped 81% year-over-year to $645 million, and platform revenue, which includes advertising and subscription revenue, rose 117% and exceeded half a billion dollars for the first time ever. Platform revenue makes up the majority of overall sales for Roku.
Roku's role in connected TV is a large driver of profits, and CTV’s growth has been steady as more people choose to consume video through devices such as Roku, Amazon Fire TV, Google Chromecast and video game consoles. Because of its growing popularity, CTV is also one of the most effective ad distribution channels.
According to advertising company FreeWheel’s most recent report analyzing the U.S. video marketplace, CTV accounted for 60% of ad views in the first half of 2021, and Roku dominated the market with 43% of CTV ad views. Amazon’s Fire TV ranked second with 26% of views. Roku’s share of the pie will expand as ad dollars continue to flow from linear TV to CTV.
Furthermore, Roku’s original content play is also in its experimental stages but if executed correctly could be another advertising revenue generator. Earlier this month, Roku announced it would be releasing 23 more Quibi shows on its platform. Roku acquired 75 Quibi originals back in January and had only released 30 as of May. The original-content strategy probably won’t grow to be competitive among the bigger rivals like Netflix or Disney, but if it does manage to at least hold its own, it will be yet another way to drive further topline growth with ads.
Though it is still in the early stages, another major catalyst for Roku is the international opportunity. Roku’s smart-TV operating system accounted for 38% of smart TVs sold in the U.S. last year, but it has a low market share of the international smart-TV market, with estimates at around 8%. Nevertheless, analysts expect Roku to have about 20% share of the global smart-TV market over the next four years or so.
Growing international scale will take time, but the estimated growth isn’t quite priced into the stock yet. While Roku’s international growth is on a steady upward trajectory, it is worth noting that the competition is growing in tandem. And some of the biggest competition comes from Big Tech giants like Google and Amazon.
The challenges Roku faces are certainly not to be ignored, but the underperformance of Roku stock this year is overblown. For investors looking to jump into the streaming space, Roku is a streaming platform play and provides a diversified way to invest in media with exposure to multiple different revenue streams. With the stock down 27% from its all-time intraday high of $490.76, this could be the ultimate buying opportunity.