Roku (ROKU 0.01%) has benefited enormously from the consumer migration to streaming this year. As total streaming hours continued to surge, new content partners have joined the Roku platform to reach millions of users.
Roku has continued to grow revenue and active accounts on its platform in 2020, even with the backdrop of a soft advertising market. Here are three reasons why the stock is a buy.
1. More people turning to streaming
A recent Roku/Harris poll of more than 2,000 U.S. adults showed that 85% of Americans are now using some form of streaming service. This is an important finding because Roku relies on digital advertising to grow its platform revenue. In the second quarter, platform revenue comprised 69% of total revenue and grew 46% year over year. Also included in this segment is revenue from subscription content, transaction video on demand, and other services.
Active accounts stood at 43 million at the end of the second quarter, for an increase of 41% year over year. As the Roku/Harris poll revealed, streaming has emerged as a primary distribution channel for content providers to reach viewers, and Roku is quickly gaining a lot of eyeballs to sell to advertisers.
2. Roku is benefiting from the shift to digital ad spending
Despite a weak advertising market, where digital ad spending was down across the market in the second quarter, Roku reported strong growth in its advertising business. The most important measure of user monetization is average revenue per user (ARPU), which grew 18% year over year.
Last year, Roku acquired dataxu to bolster its ad business, providing advertisers with more robust tools to plan and buy video ad campaigns on Roku's platform. It's already paying off, as Roku reported that monetized video ad impressions grew 50% in the last quarter, driven by the addition of dataxu's capabilities.
Roku's performance advertising business saw a 346% increase year over year in the last quarter, which management credited to higher demand from marketers who are "reevaluating their social media spending."
Overall, Roku is outperforming a digital advertising market that was estimated to be down 5% in the second quarter, according to Magna Global, while total U.S. TV advertising was down an estimated 24%.
3. Essential partner for content providers
The growth in active users is also attracting more content partnership deals. With Roku, users have many choices from top streaming services, including Apple TV+, Amazon Prime Video, and Disney's streaming service. Most recently, NBCUniversal's Peacock app, owned by Comcast, launched on the Roku platform, and in July, Peloton launched its fitness app on the platform.
Despite competition with Apple TV and other streaming devices, Roku was the No. 1 connected device based on hours streamed for Disney+ in the week after the hit musical Hamilton arrived on the service.
In 2017, Roku launched The Roku Channel, which offers free ad-supported content from top content publishers. The channel more than doubled its reach in the last quarter, which benefited from the expansion in the UK in April.
Ultimately, what sets Roku apart from the competition is the ease of browsing and other features, and the ability to watch a wide range of third-party content either through free ad-supported or transaction-based video on demand.
Roku is a top streaming stock
This growth stock has climbed 66% in 2020 so far, and that has stretched Roku's valuation to a high price-to-sales (P/S) multiple of 20. That's more than double Netflix's P/S premium.
Investors shouldn't worry about valuation during these early growth stages. Roku's current market capitalization is $28 billion, which I believe will pale in comparison to how much the business will be worth over time.
Although it's not a perfect comparison, consider that Netflix's current market cap is $214 billion and Spotify Technology has a market cap of $53 billion. Investors are placing a high value on companies involved in streaming because that's the future of entertainment. Roku will ride those coattails.
Roku is growing fast, with revenue up more than three-fold over the last five years. One-in-three smart TVs sold in the U.S. are enabled with Roku. That is driving explosive growth in active accounts.
Roku is one of the best stocks available to invest in the growth of streaming. As CFO Steve Louden stated, "Roku is an exceptional company with a strong performance culture and we've only just begun to see the full transition to streaming."