It's been a little over two years since Roku (NASDAQ:ROKU) made its market debut, and the company has been something of a juggernaut with its market cap quickly climbing to $13 billion as the stock has soared more than 360% -- even after the recent broad market slump. The gains haven't come in a straight line, however, as investors have endured days of both boom and bust.
In the wake of such a stellar advance, it's only natural for investors to ask themselves if the best gains have already been had, or if there's still gas in the tank. A quick look at the industry opportunity and the company's recent results shows that the stock is just beginning its run. Here are seven of the most compelling reasons to buy Roku right now and hold it long term.
1. Cord-cutting is accelerating
Sometimes, it's better to be lucky than smart, and in this case, Roku was in the right place at the right time to catch a mega-trend. Cord-cutting consumers are abandoning cable TV at a frantic pace.
In the third quarter of 2019, the major pay-TV operators lost 1.74 million customers, the largest single-quarter loss in industry history, according to Leichtman Research Group. That brought total losses for 2019 to 4.62 million (in just three quarters), following losses of 2.87 million in 2018 and 1.49 million in 2017.
While more and more consumers are ditching cable, that doesn't mean they're deserting television altogether. Now more than ever, consumers are adopting streaming video. In fact, early last year, streaming video subscribers surpassed cable subscribers for the first time, according to The Motion Picture Association of America (MPAA).
2. Ad-supported streaming is gaining steam
Three paid streaming services -- Netflix, Amazon Prime Video, and Hulu -- have long been the top streaming destinations, but the competition is growing among ad-supported services.
The Roku platform has been largely agnostic, allowing viewers to aggregate their paid providers and ad-supported services in one easy-to-use interface, which is attracting a steady flow of users. In the fourth quarter, Roku's active account base climbed to 36.9 million, up 36% year over year, adding 4.6 million new active accounts during the quarter.
3. Revenue is soaring
At the same time, Roku grew revenue 49% year over year to $411 million during the quarter, accelerating from the 46% growth reported in the prior-year period.
While most investors equate Roku with its streaming devices, the company sells those devices at or near cost in order to bring consumers into its ecosystem. Many would be surprised to learn that the company generates the lion's share of its revenue from advertising on its platform. That segment -- which includes advertising, The Roku Channel, and its smart-TV operating system (OS) -- was on fire last year, growing 71% year over year in the fourth quarter and now represents 63% of the company's total revenue.
In fact, during 2019, Roku's monetized video ad impressions more than doubled.
4. What matters is what's under the hood
The Roku platform provides consumers access to thousands of streaming apps that can be added to their dashboard and customized to their viewing preferences. While this technology was once limited to Roku's namesake set-top boxes and dongles, it can now be found in a growing number of smart TVs.
Rather than adapting an existing mobile app -- a path taken by many of its competitors -- Roku designed an operating system (OS) from the ground up that was custom built for the task. By applying its accumulated streaming knowledge, the company, in essence, built a better mousetrap. The Roku OS is now the system of choice for a growing number of smart TV manufacturers and nearly one in three smart TVs sold in the U.S. last year used the Roku OS.
5. A massive international opportunity
The majority of Roku's revenue is currently generated in the U.S., but the company has begun to make the move abroad. The model the company used to dominate the domestic market was so successful that Roku is now taking the show on the road and gradually entering international markets, which are expected to be equally lucrative.
Late last year, Roku kicked off its global expansion, first partnering to introduce a Roku TV in Europe, and soon thereafter making a similar move in Latin America. Those are just the first steps in what's sure to be a massive international rollout, and the world is Roku's oyster.
6. Recession resistant
One of the most compelling reasons to buy Roku is that the stock will be largely recession-resistant. In the event of a downturn, the number of new accounts might slow, but existing users aren't going anywhere. Even if they were to ditch some of their more expensive streaming subscriptions, they're still going to use Roku's interface to access the others.
7. The paradigm shift
While consumers are increasingly making the move to streaming, traditional broadcast and cable television advertising has been slow to follow. Current estimates suggest that about $70 billion was spent on TV advertising in the U.S. last year, but just 5% of that total was allocated to streaming services.
Advertising is all about eyeballs, and as a growing number of viewers migrate to ad-supported streaming, advertisers will soon follow -- right into Roku's wheelhouse.