Twitter (NYSE:TWTR) is a renowned microblogging social media platform with revenue primary from digital advertising. Streaming-media device maker Roku (NASDAQ:ROKU) also relies on digital advertising to power a significant portion of its revenue.
The COVID-19 pandemic led to global economic decline, including steep advertiser spend reductions. Is one of these two set up to weather the storm better than the other?
The impact on Roku
Roku has experienced gains from pandemic-induced shelter-at-home orders that led to a surge in streaming. Roku witnessed a record 13.2 billion streaming hours during the first quarter of 2020, up from 8.9 billion hours a year ago.
This surge helped Roku capture some of the limited spend remaining after the advertising industry's pullback. Advertisers concentrated dollars on digital options such as Roku, which provide greater measurability than traditional television outlets.
Traditional television advertising in the U.S. is big business. Ad spend exceeded $70 billion annually in the past four years. Yet even without the pandemic, consumer behavior was shifting away from traditional TV viewing.
Roku's first quarter ended at the end of March, 2.5 weeks after COVID-19 was declared a global pandemic. Its results revealed that it's a beneficiary of consumer viewing habit changes accelerated by shelter-at-home restrictions.
In 2019, Roku's revenue exceeded $1 billion for the first time, growing 52% year over year. That trend continued in the first quarter of 2020 with a 55% year-over-year increase to $320.8 million.
Roku divides its revenue, of which over 90% comes from the U.S., between platform and player sales. The former includes advertising and other revenue sources, such as licensing agreements. The latter primarily includes sales of its streaming players, a device that connects to a television to access online streaming services. Platform revenue grew substantially in 2019, driven primarily by advertising, and continues to grow in 2020 and become more of the total.
|Quarter||Platform Revenue||Player Revenue||Platform % of Total Revenue|
|Q1 2020||$232.6 million||$88.2 million||72.5%|
|Q4 2019||$259.6 million||$151.6 million||63.1%|
|Q3 2019||$179.3 million||$81.6 million||68.7%|
|Q2 2019||$167.7 million||$82.4 million||67.1%|
|Q1 2019||$134.2 million||$72.5 million||64.9%|
|Q4 2018||$151.4 million||$124.3 million||54.9%|
Not only has revenue steadily increased, other success metrics grew as well, such as the number of active accounts, which rose to 39.8 million in Q1 from 29.1 million the previous year. As more advertising shifts to streaming video, Roku will benefit.
Like Roku, Twitter seeks to capture advertising's shift to digital outlets by offering various video ads. During the company's fourth-quarter earnings call in early February, CFO Ned Segal indicated Twitter been working to make "video a much bigger part of the service," and had hoped to monetize Twitter conversations around the Summer Olympics, which have now been moved to 2021.
Unlike Roku, Twitter did not get an advertising boost with the pandemic. Because Twitter focuses on conversations around live and current events, the cancellation of sporting events, concerts, and other live experiences greatly reduced the opportunities to monetize Twitter content.
The year started with advertising revenue meeting expectations until March, when the pandemic's impact led to advertisers shifting their limited budgets into digital outlets other than Twitter, plunging its ad revenue 27% year over year for the final weeks of the quarter. By the end of the first quarter, Twitter's revenue ticked up a total of 3% year over year to $808 million, yet the company saw a net loss of $8 million due to the ad revenue drop.
But it's not all doom and gloom for Twitter. The company grew monetizable daily active users (mDAU), the number of people to whom Twitter can show ads on any given day, to 166 million, up from last year's 134 million. This is the highest year-over-year mDAU growth in the company's history. If Twitter can maintain user growth, it's poised to generate substantial revenue when advertising bounces back.
The ad spend shift from traditional television to streaming services mirrors previous traditional media transitions to digital. Newspapers and radio experienced shifts, and now it's TV's turn. Roku will benefit as this transition unfolds over the next few years.
Twitter will also see revenue increases post-pandemic as advertising returns to normal. However, I believe Twitter's growth story at this point pales in comparison to Roku's.
Roku's ad revenue growth in the face of an economic downturn illustrates that advertisers see Roku's streaming environment as more important than Twitter's. As a result, between these two technology stocks, Roku is the better buy.