Cable cord-cutting consumers were already reshaping the TV industry landscape, but that trend has accelerated in recent months thanks to the pandemic. With households stuck at home, time spent in front of a screen has skyrocketed, and internet-streamed video has been a beneficiary.
This has helped propel Roku (ROKU +0.06%) higher. While still down over 10% from all-time highs set over the summer of 2019, shares have rallied 14% since the start of 2020, and the company's report card for the first half of the year demonstrates it is still very much in growth mode. However, before investors pile in, it pays to understand exactly how the company makes money and how the trends moving it forward will change in the next five years.
Image source: Getty Images.
More users and more streaming hours carry the day
Roku's total revenue increased 42% in Q2 2020 to $356 million, a deceleration from the 52% growth rate posted in 2019 and 55% in Q1 2020. It's nevertheless a more than respectable figure considering the current state of affairs. Profitability as measured by adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was negative $3.4 million, compared to a gain of $11.1 million a year ago.
Amidst massive shifts in consumer and business behavior due to COVID-19, it's clear that Roku is emerging as a big winner from the current crisis. Its active accounts were up 41% to 43 million at the end of June, with hours of TV streamed via a Roku device up 65% to 14.6 billion during the second quarter. It's all added up to another great outing so far in 2020.
|
Metric |
First Half 2020 |
First Half 2019 |
Change |
|---|---|---|---|
|
Revenue |
$677 million |
$457 million |
48% |
|
Gross profit margin |
42.5% |
47.1% |
(4.6 pp) |
|
Adjusted EBITDA |
($19.7 million) |
$21.1 million |
N/A |
Pp = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Roku.
Where digital ads and digital content converge
While most consumers know Roku simply as the medium through which they watch TV these days, investors need to understand the trends actually lifting the company's results higher. The number of active accounts and hours of TV streamed have gotten huge bumps this year, but longer term Roku's average revenue per user (ARPU) will become increasingly important.
Over the last 12 months, Roku said its ARPU was $24.92, an 18% year-over-year increase. The more modest advance for ARPU compared to the growth in additional users has been a drag on the company's revenue growth, but over time this will be a powerful metric to focus on. Roku turns a profit from two primary means: Distribution of content via its devices, and advertising sold on its platform.
As for the former, Roku will win as TV streaming grows in prevalence. Traditional TV cord cutting (paired with TV streaming subscription growth) reached the point last year that cable lost its crown as the top TV service American households pay for.
And the trend has only continued. Disney+ (DIS +2.15%), Comcast's (CMCSA +0.32%) Peacock, and AT&T's (T 0.86%) HBO Max have all made their streaming debuts since then, and have quickly picked up tens of millions of users. Comcast also revealed it lost 477,000 cable connections in the spring, and ended June with 20.4 million connections. And streaming technology has reached a point that it may also start directly competing with movie theaters. Disney said it will sell Mulan on Disney+ for $29.99, largely bypassing the silver screen while the industry remains shuttered.
What's it to Roku? As a distributor of streaming services and purchased content, it earns a cut from sales made on its TV platform. Rather than picking which streaming service will win over the long-haul, the streaming device maker is a way to play the whole movement as more content switches over from traditional entertainment channels to ones that deliver via the web.
And then there's digital advertising, which -- like TV streaming -- also passed traditional ad formats in the U.S. in 2019. Digital ad spend both here in the States and worldwide is far from peaking. The global advertising industry should reach the $1 trillion-a-year mark within the next decade, with digital ads handily outpacing traditional ads along the way. Roku purchased dataxu, an ad purchasing tech outfit that helps marketers plan campaigns, late in 2019 to bolster its presence in the fast-growing internet-based TV ad segment.
Between growth in streaming and digital ads, Roku's ARPU should continue to expand in the coming years as more consumers make the switch away from traditional television. And even if active account activation starts to slow, this metric can keep Roku in growth mode for a long time. To help it maintain momentum in this journey, the company had $886 million in cash and equivalents and just $97.2 million in debt at the end of Q2. Put another way, it has the liquidity to continue selling devices on the cheap and expand its ad platform.
After its last quarterly update, Roku has a market cap of just $18.5 billion. It's not hard to imagine it will be much larger than it is now in another five years.
