Investors are still digesting how various industries and companies are being impacted by COVID-19. Some businesses, such as travel and apparel retailers, have been hit hard -- and it is still unclear how well they will recover. Others, such as videoconferencing and cloud-computing businesses, have been clear beneficiaries of consumers and workers sheltering at home.
Two companies that could see some headwinds in the near-term but may see accelerated momentum over the long haul due to COVID-19's impact on the economy are growth stocks The Trade Desk (TTD 4.14%) and Roku (ROKU 4.77%).
A $1,000 investment in these companies today has the potential to double over the next five to seven years. Here's why.
Betting on connected TV
Both the Trade Desk and Roku have a common denominator that makes them worthwhile long-term investments: great positioning in the fast-growing connected TV (CTV) market. Consumers are increasingly spending more time streaming their television over the internet instead of consuming it via traditional cable-TV packages. Today, two-thirds of U.S. households either don't have cable TV or plan to cut the cord in 2020. Yet only about $7 billion of the approximately $77 billion spent annually on television ads goes toward CTV ads -- the rest goes toward traditional television. Of course, this data only covers the U.S. market. The international opportunity is just as exciting.
As viewers continue shifting to CTV and cut the cord, there will likely be a tipping point when marketing on traditional TV won't make sense and ad dollars will flood the CTV market. And the timing of this tipping point may be getting pushed forward because of COVID-19. Unlike the traditional television market, which requires marketers to buy ads upfront while providing very little visibility and targeting, CTV ad spend can often be dialed up or down quickly and CTV ads are highly targeted and can be adjusted rapidly adjusted. CTV advertising, particularly CTV ads that are executed programmatically (automated ad-buying through software), gives advertisers and marketers agility and enables them to make justified data-driven decisions. When a large portion of the economy unexpectedly shutdown, CTV marketers were able to quickly adjust their ad spend and change their marketing message. Linear TV advertisers, however, didn't have the same flexibility.
The Trade Desk CEO Jeff Green believes CTV will be the biggest winner in digital advertising as a result of COVID-19's impact on the overall advertising market. "Every channel and every participant is in a different position today versus a few months ago because of one dramatic shift: linear TV's shelf life has shortened and as viewers have moved en masse to CTV," Green explained during the company's first-quarter earnings call. "The biggest loser in all this is traditional linear television, and CTV is without a doubt, biggest winner."
Strong underlying businesses
Both The Trade Desk and Roku are well-positioned to benefit from marketers shifting spend away from linear TV to CTV.
The Trade Desk is a tech company that helps marketers and ad agencies buy ads in all digital channels (audio, mobile, web, video, in-app, and CTV) programmatically -- and CEO Jeff Green has referred to CTV as the company's most important catalyst for years. The Trade Desk's overall business is growing very rapidly, with revenue rising 33% year over year in Q1 -- and that's even with the final few weeks of the quarter being negatively impacted with advertisers indiscriminately pausing and reducing their ad spend across all channels as they reacted to government orders for consumers and workers to shelter at home.
Profitability is also improving. The Trade Desk's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the quarter rose from $24.7 million in the year-ago quarter to $39.0 million. CTV ad spend on its platform notably increased 100% year over year during the quarter. But growth was also strong in audio and mobile, where ad spend rose 60% and 38% year over year, respectively.
Roku, of course, is a provider of the world's most popular streaming-TV platform. The company primarily makes money from its share of ad spend, subscriptions, and transactions on its platform. Roku's first-quarter revenue soared 55% year over year. This growth rate, however, was dragged down by sales of its streaming devices; the hardware segment saw revenue rise just 22% year over year during the period. Platform revenue, or revenue generated from ads, subscriptions, and transactions on its platform, skyrocketed 73% year over year.
Unlike The Trade Desk, Roku isn't profitable yet. But its gross profit is soaring. First-quarter gross profit was up 40% year over year. Further, the company will likely see higher revenue growth rates than The Trade Desk in the years to come since its entire business -- not just part of it -- is centered around CTV. Sustained high growth will likely help Roku achieve meaningful scale and eventually become very profitable.
Roku admits that the company could see near-term headwinds in advertising revenue because of COVID-19 but it expects an acceleration in its business over the long haul as cord-cutting persists and as marketers shift spend from traditional TV to CTV.
Investors have to pay a steep premium to buy into these exciting growth stories. The Trade Desk trades at 20 times sales and Roku trades at 10 times sales. These high stock valuations will likely translate to a very bumpy ride for shareholders since so much of their value today is based on speculative forecasts for future growth. But investors willing to hold these stocks for five years or more could see significant appreciation of their investments.