Please ensure Javascript is enabled for purposes of website accessibility

Why Roku Is the Top Streaming Play for Investors This Decade

By Kyle Salvitti - Jan 29, 2021 at 7:43AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How can you win the streaming wars? Remain neutral.

Every day, it seems a new streaming service pops up, attempting to differentiate itself from the many others fighting for our attention. As these offerings become nearly identical, competing mainly on price and content, investors will more likely benefit from this megatrend through companies that bring together all these services -- with Roku (ROKU 8.96%) leading the way.

Many consumers now watch TV through a connected television, or CTV, platform. Any TV that has access to the internet and can stream content -- whether through an external box or built-in software -- is connected, and Roku's devices and platform let users do exactly that. 

Roku doesn't care which streaming service users subscribe to or companies advertise on; its platform carries all those services, so it benefits no matter what since Roku earns revenue by taking part in a share of subscriptions and ads on its platform. This means it's profiting from popular subscription-based services like Netflix (NFLX 1.98%) and Disney's (DIS 3.51%) Disney+, while also taking a cut of ad revenue on top-tier ad-supported channels like fuboTV (FUBO 9.35%), Hulu, and its own Roku Channel.

A woman and man sit together on a couch, watching TV.

Image source: Getty Images.

Key catalysts for Roku

As every network or studio rolls out its own service -- most recently including NBCUniversal's Peacock and CBS's Paramount+ -- consumers are starting to feel "subscription fatigue" They can't or don't want to pay more and more for these ever-proliferating services. This makes bets on individual streaming services increasingly risky, but also sets the stage for ongoing rapid adoption of subscription-free, ad-supported streaming-TV solutions, an important area from which Roku's platform benefits. Because it serves up all streaming services, Roku can leverage its vast first-party data on consumer viewing habits to help brands advertise more effectively across any of those services.

Furthermore, the shift to streaming was only exacerbated by the COVID-19 pandemic, as more households cut the cord. In fact, eMarketer, a digital marketing and media company, believes traditional TV households declined by 7.5% in 2020 as many moved to streaming services, a trend that is likely to persist. As the leading streaming platform in the U.S., Roku saw a flock of new customers move to its platform during this unique time.

Dominance in streaming

As the "decade of streaming" commences, Roku commands a strong lead, as evidenced by its platform growth. From 2017 through 2019, platform revenue (revenue generated primarily from viewers watching streaming services on Roku) has grown from $225 million to $740 million, a compounded annual growth rate of more than 81%. 

Platform revenue at the end of the full year 2020 may well grow at a similar rate. In a recent press release, Roku announced more than 51.2 million active accounts, an increase of 14 million in 2020 alone. Another interview with the CFO mentioned that streaming hours on the platform grew to 17 billion in the fourth quarter of 2020. While Roku hasn't officially released its earnings for the most recent fiscal year, these signs point to strong performance.

Growth opportunities

Thanks to the large amounts spent on ad buying in television and the reach connected television has, many companies like Procter & Gamble (PG 1.53%) and Cadillac are shifting spend from traditional TV to CTV platforms. As Cadillac Associate Director Marcie Perez states, CTV allows brands to be "very flexible and nimble" when purchasing ad inventory. Companies are more likely than ever to move more ad spend to CTV as traditional TV declines. 

Roku already reaches about 1 in 3 households in the U.S., so it may appear that it has little room to grow. But its international markets remain nearly untapped, and the company management has mentioned its U.S. strategy is already proving effective in international markets. Its international strategy is currently taking place with its recent deal with Philco, an early pioneer in TV manufacturing, to launch a Roku TV lineup in Brazil, where Philco has a popular brand. This highlights that Roku still has ample room to grow as CTV takes over living rooms globally. 

Still worth buying?

As restrictions cast upon us from the pandemic are lifted, many analysts expect TV viewership to decline. But even if hours watched shrink slightly, CTV is going nowhere. Cord-cutting was already taking place pre-pandemic; COVID simply sped it up. This trend is likely to continue, and Roku is positioned perfectly to take advantage of it. Regardless of what streaming services prove successful, Roku gains from all of them. 

When compared to its March price-to-sales ratio of 8.93 times trailing revenue, its current valuation of roughly 33 times trailing revenue may appear high. However it is reasonable to expect Roku to be worth multiples more in the long run as the streaming wars play out.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$96.47 (8.96%) $7.93
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$109.32 (3.51%) $3.71
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$195.19 (1.98%) $3.79
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$148.72 (1.53%) $2.24
General Motors Company Stock Quote
General Motors Company
GM
$38.57 (3.07%) $1.15
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$44.16 (0.07%) $0.03
Paramount Global Stock Quote
Paramount Global
PARA
$33.91 (4.66%) $1.51
fuboTV, Inc. Stock Quote
fuboTV, Inc.
FUBO
$3.51 (9.35%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.