Recently, many high-growth tech stocks have surged. Investors are betting on these companies as a way to profit from work-from-home trends and the acceleration of organizations' digital transformations. But one notable fast-growing tech company has been left out of this outperformance in 2020: video-streaming company Roku (NASDAQ:ROKU). The stock is down 20% year to date, significantly lagging the S&P 500's 7% decline in 2020.
Investors have good reason to be concerned about the tech company's growth story in the near term. One of Roku's main growth drivers -- streaming-TV advertising -- has been hit hard as many businesses slashed their ad budgets or even paused ad campaigns entirely amid lockdowns. But as the economy reopens, Roku is well-positioned to return to the monstrous growth it was seeing before COVID-19.
Here are three reasons I'm going against the market's fear and buying shares of Roku.
1. CTV ad spend is rebounding
Roku's first quarter of 2020 had only a few weeks of overlap with the impact of lockdowns on advertising budgets. This meant the company was still able to serve up 55% year-over-year growth in total revenue, despite some headwinds toward the end of the quarter. But the company provided some insight into how things were faring between mid-March and May 7, when Roku released its first-quarter update. The company's "advertising business has seen higher than normal cancellations as overall advertising budgets have declined," management said.
But there are signs that connected TV advertising has begun to rebound from a low point during late March and early April. Consider that The Trade Desk (NASDAQ:TTD) said that after ad budgets across all channels saw indiscriminate reductions in late March, CTV ad spend on its platform was up 20% year over year through the first 20 days of April and increased about 40% year over year during the last 10 days of the month.
2. Traditional TV ad budgets are quickly shifting to CTV
While CTV ad spend is getting hit temporarily due to lockdowns, Roku said in its first-quarter shareholder letter that this negative tailwind has been "partially offset by ad-spend that has moved to Roku from traditional TV budgets."
The Trade Desk CEO Jeff Green is similarly optimistic about this environment accelerating the shift of traditional TV advertising budgets to streaming. "[L]inear TV's shelf life has shortened ... as viewers have moved en masse to CTV," Green explained. "The biggest loser in all this is traditional linear television, and CTV is without a doubt, [the] biggest winner."
Of course, this makes sense intuitively. With such a sudden change in the economic environment, upfront commitments required for most traditional TV advertising likely left a sour taste in marketers' mouths. In connected-TV advertising, advertisers get more measurability and agility -- two important factors during times like these.
3. Looking beyond CTV advertising
While surging growth in CTV ad spend on Roku's platform has been a massive driver for the company's growth in recent years, investors shouldn't forget that it's only part of the CTV growth story powering Roku's business. The company also makes money from subscriptions on its platform. This has been a consistent catalyst for Roku over the years, particularly during lockdowns.
With consumers sheltering at home during COVID-19, it's not surprising to learn that CTV viewership soared recently. The company said there was an acceleration in both new account growth and viewership in April. "Streaming hours rose by roughly 80% year-over-year, driven by an increase in streaming hours per account of approximately 30%," management explained. This means the company's subscription trials and paid subscriptions jumped, too.
While Roku refrained from providing guidance for its second quarter due to uncertainties surrounding COVID-19, strong growth in subscriptions and the beginning of a rebound in connected TV advertising as Q2 progresses may help make up for weakness in CTV advertising in the beginning of the quarter.
Over the long haul, however, Roku should benefit from the massive tailwind of marketers shifting advertising budgets away from traditional TV to streaming TV as they chase viewers' attention. These are still early days in that shift, as eMarketer estimates that marketers allocate about $70 billion annually to traditional TV advertising in the U.S. alone, yet CTV ad spend in 2019 was just $7 billion.
COVID-19 may be the tipping point needed to get marketers to shift from the old guard to the new -- and Roku will likely be a major beneficiary.