Roku (ROKU +0.53%) has been a great investment since its initial public offering (IPO) in 2017. The stock is up a whopping 2,750% from its IPO price, while the broader S&P 500 has gained just 73% over the same period.
So what's fueling that outperformance? More consumers are tuning into streaming services on connected TVs, allowing Roku to establish itself as a key player in the digital ad space. Even so, the shift away from traditional TV is far from complete, and Roku retains strong prospects for future growth.
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The leading streaming platform
Roku is the most popular CTV operating system in North America. As of late 2020, the company had 38% and 31% market share in the United States and Canada, respectively. Its platform allows viewers to access premium and ad-supported streaming services, including its own ad-supported content on The Roku Channel.
This business model creates a flywheel effect. As Roku adds more content, viewers spend more time engaged with the platform. That, in turn, should bring more marketers and ad dollars to Roku, increasing its ability to invest in new content and engage viewers.
The company's ad tech platform, Roku OneView, is a critical part of that equation. OneView allows marketers to target ads and measure performance in a way that's not possible with traditional TV. Moreover, Roku's status as the top streaming platform means it has more first-party data than its rivals, which should allow marketers to target ads more effectively.
That's why Roku dominates the CTV ad market. In the fourth quarter of 2020, 46% of all programmatic CTV ad spend went to Roku devices, while second-place Samsung captured just 11%. As a result, Roku's gross profit surged 63% last year. That strength carried into the first quarter of 2021 -- ad impressions delivered on Roku's platform more than tripled, and gross profit surged 132%, marking a significant acceleration.
Taking a step back, Roku's solid financial performance is nothing new. The company has consistently posted strong growth in recent years with revenue climbing from $513 million in 2017 to $1.78 billion last year. And in that same period, gross margin expanded from 39.0% to 45.4%, while free cash flow increased 135% to $66 million.
A big market opportunity
Roku should benefit from several tailwinds in the coming years. First, research from Parks Associates suggests 43% of U.S. broadband households that pay for traditional TV will cut the cord in the next 12 months. This should spark a shift in ad dollars as brands continue to follow consumers to streaming platforms.
Second, Roku is more aggressively pursuing exclusive content, which should accelerate the flywheel that powers its business. In March, CYPHER debuted on The Roku Channel, and it became the top-ranked show during its first weekend. Then in May, 30 "Roku Originals" launched on The Roku Channel, driving record-breaking engagement in the two weeks that followed.
Finally, the company is expanding globally. In 2020, Roku brought its first streaming device and smart TV to Brazil, doubled the number of Roku TV brands in Mexico, and launched The Roku Channel in the U.K.. Each of these moves should help it capture more TV ad spend -- a market that hit $278 billion worldwide last year, according to IMARC Group.
That's why I own this growth stock.
