There's little doubt that the advent of streaming video is changing the way we consume entertainment. Netflix was among the first companies to fully appreciate the magnitude of the paradigm shift that would follow and lean into its nascent streaming business. A host of providers have since followed suit, with Amazon.com's Prime Video and Disney's Hulu rounding out the top three.
Hidden among the hundreds of other companies providing streaming video services is an unlikely investment possibility -- but one that shouldn't be ignored -- Roku (ROKU -10.29%).
While most investors still associate the company with its namesake streaming boxes, Roku has evolved into much more than the sum of its parts, providing a unique opportunity for investors. The stock has soared more than 450% so far in 2019 -- making it one of the best-performing technology stocks of the year -- and it could just be getting started. Here are three reasons why.
Image source: Roku.
1. Most of its revenue is now from advertising
While Roku still provides the set-top streaming boxes that bear its name, it derives most of its revenue from advertising. Roku provides a single location where consumers can find and aggregate their favorite streaming apps. In doing so, the company is entitled to sell ads on the hosted channels, provide paid placements for others, and even offer limited advertising on its homepage. The company also controls all the ads on The Roku Channel, its own ad-supported streaming app.
Advertising has been extremely lucrative for Roku. While revenue of $250 million grew 59% year over year, platform revenue -- which consists largely of advertising -- increased to $168 million, up an incredible 86% year over year.
There's an ongoing shift from traditional broadcast television to streaming platforms. According to data from the Interactive Advertising Bureau, 60% of advertisers said they plan to increase their budgets for ads on streaming devices. As this trend continues, Roku is uniquely positioned to capture a growing share of that advertising.
2. Its connected-TV operating system is becoming the industry standard
Because people want to be able to easily access their favorite streaming apps on their connected TV, manufacturers have two choices: create and maintain a user-friendly operating system (OS) to power their televisions (and update it for the next five to 10 years), or license the technology from another provider.
Luckily for many television manufacturers, Roku designed its OS especially for the task (rather than modifying an existing mobile app like many others). The company now offers this system to all comers for a nominal fee, which is generally much more cost-effective for manufacturers than creating their own OS from scratch.
By taking this path, Roku has become the No. 1 television streaming platform in the U.S., with more than 1-in-3 smart TVs sold in the country so far this year powered by Roku's technology. It also has a 44% share of the U.S. internet-TV device market, outpacing Amazon's Fire TV with 33%, according to eMarketer.
3. It has access to a valuable commodity: Data
The popularity of its streaming devices and its clever connected-TV strategy have caused Roku's user base to surge. The company ended the second quarter with more than 30.5 million active accounts, up 39% year over year. To put that into perspective, that puts a Roku device in about 1 in every 4 U.S. households.
This gives the company a nearly unmatched treasure trove of user data in the ad-supported streaming space, with a growing body of information about the viewing habits of these consumers. This data helps inform Roku's ad choices and placement, making ads much more effective. It also gives advertisers a higher degree of confidence that their ad dollars are being well spent.
Investor takeaway
Roku began as a humble provider of set-top boxes but has recently emerged as an advertising powerhouse. With devices in a quarter of U.S. homes and its international expansion still in the early stages, Roku has a massive addressable market and plenty of opportunity in the ad-supported streaming space.
It's important to note that it's unlikely Roku will see similar stellar gains over the near term. It's incredibly rare for a stock to soar more than 450% in a given year. It's even rarer still that it can repeat that performance. While the company still has a long runway for growth, its future gains will likely be more measured. Additionally, there are currently lofty expectations baked into Roku's stock price and any signs that its revenue or account growth is slowing could result in a swift and potentially brutal correction.
That said, even after massive gains so far this year, the best may be yet to come for Roku investors in the months and years to come.
