The COVID-19 pandemic has devastated businesses that were forced to slash expenses as revenue plummeted. For many, one of the first cuts was to advertising spending, and for companies with revenue models heavily dependent on ad spending, that was painful.
But ad spending will return, and two companies -- Roku (ROKU -4.98%) and The Trade Desk (TTD -0.58%) -- appear to be perfectly positioned to benefit from that rebound and also from an accelerating trend. Marketing dollars are moving from traditional platforms like radio, print, and linear television to online platforms like mobile phones and connected television (CTV).
Maybe you've heard of Roku; maybe you are one of the millions of people with an account. Roku sells devices that connect televisions to the internet, allowing viewers to stream digital content. The company has built a huge user base and is set to monetize that platform for years. The Trade Desk isn't as well known, unless you're a digital marketer. The company has software that helps advertisers better target the specific online audiences they want to reach.
Over the past three years, The Trade Desk and Roku are both up more than 700%, as of this writing, crushing the S&P 500's 32% gain. The companies are well-positioned for future growth, but I think one has an advantage that makes it the better buy right now.
All about Roku
Roku is a pioneer in streaming TV. Attach a small device to the TV, and thousands of streaming channels are available to be downloaded like apps on a phone. Some are free; some you have to pay for, like Netflix. The easy user interface and early mover advantage helped Roku build its platform's popularity, something that has accelerated during the pandemic as people stay home more.
Roku is streaming TV's market share leader. According to eMarketer data from February, the company had 47% of the market and 85 million users. (Active accounts often have multiple users.) Roku was forecast to have more than half the market share by 2022. Amazon's Fire TV was second in market share, with an estimated 71 million users.
Roku gets revenue through device sales and also grows its user base by licensing its operating system to TV manufacturers. The bigger revenue growth, however, comes from monetizing the platform. The company charges user fees and also generates advertising revenue. In May, Roku launched OneView, a platform advertisers can use to target specific audiences. OneView is a Trade Desk competitor and leverages Roku's massive data set.
Roku's business model is strong. Content distributors benefit by gaining access to viewers, who are spending more and more time on the platform -- an average of 3.73 hours per day. Roku benefits by monetizing the content. Its net revenue increased 42% in the second quarter, and average revenue per user (ARPU) has more than doubled in the last three years, to $24.92.
All about The Trade Desk
The Trade Desk's self-serve platform helps advertisers target specific audiences across the web, whether on mobile, desktop, or CTV. After marketers run those ads, they receive reports showing effectiveness, which helps determine future campaigns' targeting or messaging.
The Trade Desk has reported a 95% customer retention rate for 27 straight quarters, and that loyalty has helped power a blazing compounded annual revenue growth rate of 48% from 2016 to 2019.
The growth took a pandemic-related hit in spring when advertising budgets were cut. Second-quarter revenue was down 12.9%, but it's likely a short-term problem. Management said year-over-year spending turned positive by mid-June and continued into July.
There was a notable bright spot in the company's earnings: Connected TV spending rose 40%. "We believe the COVID pandemic has permanently accelerated the growth of connected television, changing the TV landscape forever," The Trade Desk founder and CEO Jeff Green said during the company's earnings call.
The Trade Desk is well-positioned for future growth in digital advertising. While worldwide ad spending is forecast to drop 5% this year, digital ad spending will grow 2.4%, according to eMarketer. It's the slowest digital growth rate on record, but still a positive sign for The Trade Desk.
The final call
These high-growth companies have lofty valuations. Roku trades at nearly 17 times sales and is up more than 40% year to date. The Trade Desk trades at nearly 33 times sales and is up more than 75% so far this year. With such steep valuations, there is a possibility of short-term volatility, but their long-term growth prospects remain strong.
Right now, I think Roku is the better buy. Its lower valuation is one reason, but I think a bigger reason is its massive and growing user base. The platform's value should keep increasing as people continue to cut cable and satellite services in favor of streaming options.