There are few stocks that have been as successful as Amazon (NASDAQ:AMZN). Over the years, the e-commerce giant has expanded into countless new businesses, growing its brand ecosystem and making it one of the top-performing stocks in the S&P 500 for over a decade. Even with the uncertainty surrounding the COVID-19 outbreak, the stock has still managed to hold its own.
However, there is one high-growth technology company that could have what it takes to outperform the e-commerce giant in the next decade. Roku (NASDAQ:ROKU) has already been a massive wealth creator for early investors.
The stock went public in Sept. 2017 at a price of $14 per share, and it touched a record high of $176.55 in Aug. 2019. Shares have since fallen about 40% due to concerns over the pandemic and the stock's high valuation.
Roku is set to become the largest streaming device player
Roku and Amazon compete head to head in the streaming device market. On Jan. 6, the latter announced that Amazon Fire TV had over 40 million active users globally. Roku, on the other hand, finished 2019 with 36.9 million active users, but that figure quickly climbed to 39.8 million as of Mar. 31.
Amazon may lead the pack in terms of global market share for now, but Roku is just getting started with international expansion and announced its entry into South America's biggest market earlier this year. It will be partnering with AOC and Globoplay in Brazil's smart-TV space. Similar expansions can drive the company's top line for years as it continues to target other growth markets in both emerging and developed economies.
Roku will benefit from the shift to streaming
The cord-cutting phenomenon will not just benefit streaming services from Netflix, Walt Disney, and Amazon; it will also be the key driver of Roku's growth going forward.
A slew of new streaming services and multibillion-dollar investments in original content continue to enrich the viewing experience for consumers and pull them away from traditional pay TV. In Roku's latest press release, the company went so far to say, "We predict that by 2024 roughly half of all U.S. TV households will have cut the cord or never had traditional pay TV."
The company's statement continues:
While streaming became mainstream in the last decade, it is still a minority of TV viewing. We have now entered the streaming decade when we believe consumers around the world will choose streaming as their primary way of viewing TV. We believe that we are well positioned to thrive in this new decade based on our increasing brand strength, the scale of our growing active account base, our purpose-built TV streaming operating system (OS) and first party customer relationships with growing engagement.
During the fourth quarter, the number of streaming hours on the Roku platform rose 60% year over year to 11.7 billion hours, outpacing even the 36% growth in active accounts and 29% rise in average revenue per user (ARPU). For full-yer 2019, streaming hours were up 68% to 40.3 billion.
The platform segment is key to growth
Roku generated just 34% of revenue from selling its streaming devices in 2019. The majority of its top line comes from the platform business, which generates sales from advertising and licensing fees.
We know that channels monetize content via ads or subscriptions. Roku gets a percentage cut from all of these transactions on its platform, whether that's part of the ad inventory or a portion of the streaming subscription cost.
The average revenue per user on the Roku platform grew 29% in 2019 to $23.14, and it has more than tripled from the $6.48 reported in 2015. We can see how Roku is able to improve monetization through higher customer engagement.
The upcoming decade will see a massive shift to online streaming, and the corresponding boost to Roku's licensing fees and ad revenue will fuel continued, rapid revenue growth for the company.
Furthermore, the Roku Channel, which is the company's own ad-supported streaming channel, has aggregated a strong library across genres from multiple content providers. This channel should also increase user engagement and monetization for Roku and its channel partners over the next few years.