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3 Catalysts for Roku Stock

By Daniel Sparks – May 24, 2020 at 7:45AM

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These may still be early innings for this fast-growing tech stock.

2019 was an incredible year for streaming-TV platform specialist Roku (ROKU -0.52%). The company's revenue soared 52% year over year and gross profit surged 49% over the same timeframe. This was all fueled by the addition of 9.8 million active accounts, a 68% jump in streaming hours, and a 29% increase in average revenue per user. Investors have applauded the momentum, bidding shares more than 20% higher over the past year -- a period in which the S&P 500 rose only 3%.

While it's tempting to think that Roku's best growth may now be behind it, this is unlikely. The secular tailwinds and business momentum powering the tech company higher are as strong as ever. Indeed, these are arguably still early days for Roku.

Here are three key drivers for Roku's business that could help the company's strong growth persist for years to come.

An AOC-powered ROKU TV

A Roku-powered TV. Image source: Roku.

Cord-cutting

First, there's the overall trend of cord-cutting as consumer attention is transitioning away from traditional television to streaming TV. eMarketer recently estimated that 25% of U.S. households will have cut ties to cable subscriptions entirely by 2022. Further, eMarketer forecasts that by 2021 77% of U.S. households will have connected-TV devices. However, pre-COVID-19 estimates may prove to be conservative, as many economic trends surrounding the coronavirus outbreak are likely accelerating the transition to streaming.

Roku CEO Anthony Wood explained how COVID-19 has been a catalyst for cord-cutting during the company's first-quarter earnings call:

[A] clear trend that we're seeing here is that the pandemic in all its various aspects are accelerating trends that we've already started before the pandemic, particularly the transition to streaming. So things like lack of sports, a desire to save money, a move toward value those kinds of trends are accelerating streaming and they're accelerating cord-cutting.

As cord-cutting accelerates, this will obviously benefit both Roku's subscription- and ad-supported services as streaming hours increase and as users sign up for more TV services on Roku's platform.

Shifting TV ad budgets

Of course, ad dollars ultimately follow consumer attention. It's not surprising, therefore, that marketers' ad budgets are shifting away from traditional linear television to connected TV.

Citing COVID-19's impact on consumer behavior, sliding ratings for linear TV, and Roku's innovation in helping advertisers target consumers on its platform, management believes advertisers "will accelerate their reallocation of linear TV budgets to Roku," the company said in its first-quarter shareholder letter. "Brands are reassessing their entire marketing mix and many are showing a preference for our targeted, more measurable form of advertising as well as the flexible solutions we offer, such as sponsorship and interactive overlays," management explained.

Roku Channel

Finally, there's Roku Channel, an app on Roku that curates subscriptions and ad-supported services into one viewing experience. This has been a boon for the company, with Roku Channel growing "substantially faster than the overall platform," the company said in its first-quarter shareholder letter. More specifically, there was a more than 100% year-over-year increase in streaming hours during the quarter. This compares to a 49% bump to streaming hours for its overall platform.

As users embrace the Roku Channel, this further entrenches the company's customer base and it gives Roku more control over the overall experience.

Over the long-term, there's no sign of a slowdown for any of these catalysts. In the near-term, however, revenue growth may take a hit as marketers cut back ad spend amid store closures and travel restrictions. But as the economy starts to reopen, Roku is well-positioned to return to revenue growth rates around the levels seen before the coronavirus. More importantly, COVID-19's impact on consumer behavior will likely accelerate cord-cutting and advertisers' budgets away from traditional TV toward connected TV.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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