Connected TV is a no-brainer megatrend to invest in. In life, some roads are one way, and video content is headed down a one-way street from linear TV (scheduled, real time) to connected TV (streaming, on demand).
Both consumers and content publishers will propel this trend forward. Once consumers experience a library of on-demand video content, I sincerely doubt they'll ever go back. People get to watch what they want when they want instead of flipping through channels to see what's on. On the publisher side, they'll follow consumer demand by launching streaming services -- the same way AT&T recently launched HBO Max. After all, there's little economic incentive to continue doing business the old way if it's dying out.
The pace of linear-TV's death is accelerating. All five of the top pay-TV providers lost consumers this past quarter, a time when everyone was sheltering at home watching TV. According to Leichtman Research Group (LRG), the major players combined lost over 2 million subscribers.
That's a huge loss in a single quarter. But here's the thing: These companies still have 84 million subscribers, which suggests that this rock has a lot further to fall. And it could happen extremely fast. Also, according to LRG, 80% of households in the U.S. already own a connected-TV device. So most of those 84 million accounts could simply flip a switch today if they wanted.
However, we're still in the early innings of connected TV's rise until those millions make the jump. Therefore, investors should be invested in the best-positioned companies to profit from this profound shift. Roku (ROKU -0.67%), LiveRamp Holdings (RAMP -1.62%), and The Rubicon Project (MGNI -0.46%) are absolute no-brainer stocks to buy for the connected TV trend.
The operating system
There are multiple ways to consume streaming video, including video game systems, mobile apps, and visiting a website on your desktop. But arguably, the most preferred way is with a TV while sitting on your couch -- if your TV can handle it. Some TVs can be upgraded via external hardware, while others come with an operating system built in. Fortunately, Roku powers both.
Roku's revenue is divided into two segments: player and platform. Its player revenue comes from selling the hardware equipping non-smart TVs to be able to stream. For its platform segment, it generates revenue through things like advertising and by taking a cut from streaming subscriptions.
Roku's platform segment is the one to watch. In the first quarter of 2020, platform segment revenue grew 73% year over year to $233 million. And it accounted for 73% of total revenue and 93% of the total gross profit.
Basically, the more consumers stream content on Roku, the better for platform revenue. That being the case, here's what makes Roku a true no-brainer stock: The company is quickly becoming the default operating system for smart TVs around the world.
According to the company, 1 in 3 U.S. smart TVs sold in Q1 run on Roku. In Canada, it's 1 in 4. And the company is forging partnerships worldwide to make this a global trend.
The first mover
It's not easy to succinctly explain what LiveRamp does. Right now, suffice it to say that LiveRamp plays a middleman roll, integrating with ad platforms and connecting businesses to create targeted ad campaigns while protecting customers' personal privacy and businesses' proprietary data.
In terms of competition, Comcast, Charter Communications, and ViacomCBS recently teamed up with a platform called Blockgraph, which will allow these three media empires to share anonymized audience data to improve advertising, much like LiveRamp.
These are three major video-content publishers that have their own software and likely won't use LiveRamp's anytime soon. Why is that good? Growing competition gives legitimacy to what LiveRamp is doing. This solution is important for the future of connected TV.
LiveRamp has a competitive advantage as a first mover -- it's already obtained a plethora of key partnerships. Consider that 35 of the top demand-side ad platforms are integrated with LiveRamp. And on the supply side, it's partnered with platforms representing 90% of the ad inventory.
There's a lot to like about LiveRamp, but here's what makes this stock a no-brainer: As of March 31, the company had $718 million in cash on the balance sheet and zero debt.
For perspective, its market capitalization is only $3 billion. This pristine balance sheet significantly decreases the downside risk and gives the company incredible optionality as it executes on its vision in a rapidly evolving space.
The value play
In our modern world, advertising is increasingly digital. And digital advertising happens after a split-second bidding war takes place between demand-side and supply-side advertising platforms. The Trade Desk is the behemoth on the demand side with an $18 billion market cap. Investors are flocking to this stock because it's delivering superb revenue growth (up 39% year over year in 2019) in the enormous $725 billion global ad-spend space.
However, The Trade Desk trades at a premium valuation of 26 times trailing sales. If that's too rich for you, look at The Rubicon Project on the supply side. It's not growing as fast but trades at a much more reasonable valuation, under five times sales.
Generally speaking, it's not a great plan to buy stock in underperforming companies just because the valuation is cheaper. But with The Rubicon Project, I'll make an exception. That's because, after its recent merger with Telaria, its past performance may not be a good indicator of how it will perform in the future. And the two companies merged to better profit from the connected-TV megatrend as the largest independent supply-side platform.
The merger was completed on April 1, so the benefits are still forthcoming. Upcoming second-quarter revenue guidance is lackluster -- down sequentially. However, if the shift to connected TV is as big as we've seen, then it's a no-brainer move to own the largest supply-side ad platform before the benefits of its merger begin to pay off. It's valuation is reasonable and the stock is still on sale, down around 50% from its 2020 highs.