Roku (ROKU -0.19%) is killing it in streaming. The stay-at-home dynamic caused by the pandemic gave the company a boost, but the momentum was already building before 2020. Revenue growth has accelerated over each of the last three years, and with more content being added to the platform to attract more users, the best is yet to come.
Here are three factors that are turning Roku into a growth machine.
1. Leveraging data on 51 million accounts
Roku grew its total active accounts to 51.2 million in 2020 for an increase of 39%. This growing base is providing the company with lots of actionable data on what its users are watching. Management looks at this as a key advantage that not only helps inform what content Roku should acquire for the platform, but also bolsters the advertising side with Roku's OneView platform.
To prepare for the wave of advertising dollars that are starting to shift to digital video services, Roku acquired dataxu in 2019, a platform that helps marketers plan and buy video ad impressions. In 2020, Roku integrated dataxu's technology to create the OneView platform, which offers advertisers the tools they need to monitor the effectiveness of their ad campaigns.
All said, Roku has made significant efforts to make its platform very ad-friendly for third parties, and it's working. In the fourth quarter, management reported strong advertising growth, with monetized video ad impressions more than doubling year over year. Average revenue per user -- a key metric that measures how well Roku is monetizing its active accounts -- grew 24% last year to reach $28.76.
2. Demand for free content
One of the things Roku noticed in its data years ago was that people wanted free, ad-supported TV. This led to the launch of The Roku Channel in 2017.
The Roku Channel grew at nearly double the rate as the rest of Roku's platform in the last quarter and reached 63 million people.
But the most impressive aspect of the channel's reach is the rate at which it's growing. The company reported that The Roku Channel's household viewership grew 100% year over year in the fourth quarter, which is a similar increase from the third quarter. At this rate, it's going to scale into one of the most widely used streaming options soon enough.
The Roku Channel will play a big role in Roku's growth. In its fourth-quarter report, the company stated, "The Roku Channel drives a virtuous cycle of viewers, advertisers, and content which in turn drives continued growth in viewing hours, reach, advertising revenue, and content options."
3. Something for everyone
It's clear that Roku is building a tremendously valuable streaming platform with strong competitive advantages. More than a third of smart TVs come pre-installed with Roku OS, which is already a major advantage. But once on the platform, users are getting bombarded with free content and convenient access to a host of top streaming services from Netflix to NBCUniversal's Peacock, among dozens of others.
Moreover, Roku is seeing a revival in transaction video on demand, such as new releases that you purchase or rent. If a user comes to the Roku platform and signs up for a subscription to, say, Disney+, or pays a rental fee to watch a new release, Roku gets a cut of that purchase.
Roku is growing fast because it offers an appealing blend of free content, subscription video on demand, and transaction video on demand. It's basically a one-stop shopping destination in the streaming market. There are multiple ways for it to monetize its users, which explains why its platform revenue, including advertising and transactions made on the platform, grew 71% in 2020.
A simple way to gauge how well Roku is executing its strategy is to watch average revenue per user (ARPU). Management believes ARPU represents the inherent value of the business. The further Roku can grow active accounts and ARPU, the more the stock should reward investors over time.