Four years ago Roku (ROKU 1.13%) went public at $14 per share. The streaming device company's stock opened at $15.78 on the first day, closed at $23.50, and now trades in the $340s. If you had invested $1,000 at the declared IPO price, your stake would be worth nearly $25,000 today.
I was initially skeptical about Roku. It had established an early-mover advantage in streaming devices, but it faced intense competition from bigger tech companies like Amazon, Apple, and Alphabet.
However, Roku's sales soared, profit margins improved as it expanded its software ecosystem, and the company maintained its lead in the important North American streaming device market. Let's see how Roku generated such massive gains in such a short time, and whether or not it can maintain that momentum.
Image source: Getty Images.
How rapidly did Roku grow over the past four years?
Roku's number of active accounts and average revenue per user (ARPU) have nearly tripled since the end of 2017. Its average number of annual streaming hours nearly quadrupled between 2017 and 2020.
That robust growth caused Roku's revenue growth to accelerate significantly over the past four and a half years. It also fared well throughout the pandemic last year as more people stayed at home.
|
Period |
FY 2017 |
FY 2018 |
FY 2019 |
FY 2020 |
1H 2021 |
|---|---|---|---|---|---|
|
Active Accounts (Millions) |
19.3 |
27.1 |
36.9 |
51.2 |
55.1 |
|
Streaming Hours (Billions) |
14.8 |
24.0 |
37.8 |
58.7 |
35.7 |
|
ARPU (TTM) |
$13.78 |
$17.95 |
$23.14 |
$28.76 |
$36.46 |
|
Revenue Growth (YOY) |
29% |
45% |
52% |
58% |
80% |
Source: Roku. YOY = Year-over-year. TTM = Trailing 12 Months.
When Roku went public, the bears claimed that commoditization of the streaming device market would crush its margins before the company could significantly expand its software platform, which generates higher-margin revenue from integrated ads and content partnerships.
But in the first half of 2021, Roku's hardware business accounted for just 18% of its revenue and 1% of its gross profit -- compared to 56% of its revenue and 15% of gross profits in 2017. That transition boosted and stabilized Roku's gross margins, even as it sold cheaper hardware devices to compete against Amazon's Fire TV, Apple TV, and Google's Chromecast and Android TV devices:
|
Gross Margins |
FY 2017 |
FY 2018 |
FY 2019 |
FY 2020 |
1H 2021 |
|---|---|---|---|---|---|
|
Player |
10.2% |
11% |
4.4% |
8.5% |
3.7% |
|
Platform |
75.7% |
71.1% |
64.5% |
60.3% |
65.8% |
|
Total |
39% |
44.7% |
43.9% |
45.4% |
54.5% |
Source: Roku.
Roku's platform gross margins have fluctuated due to macro headwinds for advertisers and the introduction of new original content (including its portfolio of Quibi's shows) for the Roku Channel, but the segment's growth and scale are easily offsetting the player segment's declining margins.
These metrics suggest Roku, like its bigger tech rivals, can sell its players at breakeven margins or losses to expand its software ecosystem. They also indicate the Roku Channel has carved out a growing niche in the ad-supported streaming video market, and that it will benefit from the ongoing shift from traditional "linear TV" advertising platforms toward connected TV platforms.
Does Roku's stock still have room to run?
Roku's stock fell nearly 20% over the past month after it posted a deceleration in its year-over-year growth in active accounts and streaming hours in its second-quarter report in early August. Its hardware gross margin also turned negative due to supply chain challenges and component shortages.
Roku attributed its slowing user growth to relaxed COVID-19 restrictions but noted that 19% year-over-year growth in streaming hours during the quarter still outpaced the growth of the traditional TV and broader streaming video markets.
Wall Street still expects Roku's revenue to rise 60% this year and 37% next year. The company also turned profitable on a GAAP basis in the first half of 2021, and analysts expect it to generate a full-year profit this year and 28% earnings growth next year.
Roku is still growing as it faces tougher year-over-year comparisons in a post-pandemic market, but its stock already trades at 210 times forward earnings and 16 times this year's sales -- so it needs to keep hitting home runs to justify those premium valuations.
I don't expect Roku to replicate its post-IPO gains over the next four years, but its future still looks bright. Investors who can stomach Roku's near-term volatility should accumulate some shares today.
