The dramatic fall of streaming company Roku (ROKU 8.02%) continues; shares are now down more than 70% over the past year. Drops this big can be stressful, and investors might wonder what the future holds for the company.
Understanding how a company sells simple products like chocolate or soda is one thing, but some businesses are more complex, and investors can misunderstand them.
Roku seems to fall into this category, which might help explain the stock's struggles in this turbulent market. Here are three things savvy investors know about Roku that could help you consider a potential investment.
1. Roku isn't a hardware company
I would argue that the most misunderstood aspect of Roku is what the company's actual core business is. It sells a handful of dongles, streaming sticks, and other hardware, which is probably the part of Roku that consumers see the most.
However, player revenue (what Roku calls its hardware segment) was just $480 million in 2021, or 17% of its total. The rest falls under its platform segment: royalties for its software that goes into various brands of smart TVs and the money it gets from selling ads on its platform.
The company's platform revenue grew 80% year over year in 2021 and carried 60% gross profit margins in the fourth quarter, while the hardware segment had negative 28% margins. The hardware it sells is a loss leader, designed to get users into Roku's ecosystem rather than make money.
Roku's ad business is helping it make more from its users; average revenue per user (ARPU) grew 43% year over year in the fourth quarter of 2021, to $41.03. This metric was just $23.14 in the same period two years ago.
2. The Roku Channel could fuel growth
As a streaming customer, I can tell you that content keeps getting more expensive (and you've probably experienced it yourself). Netflix was the pioneer of streaming, but many competitors have launched competing services. It doesn't take long to stack up enough streaming subscriptions to pay what traditional cable used to cost.
In Netflix's 2022 first-quarter earnings call, CEO Reed Hastings even alluded to the likelihood of offering a low-price, ad-supported plan in the next year or two to give consumers "choice." Speaking of ad-based video on demand (AVOD), it's growing faster than the subscription-based version, and Roku has already invested in this area.
It offers the Roku Channel, a free streaming service built into every Roku TV and streaming device. It uses a combination of content from third parties and original programming with ads to monetize the audience. Hours streamed on the Roku Channel more than doubled year over year in 2021, and it's been a top-five app on the Roku platform over the past two quarters. Investors should look for progress in the Roku Channel's growth, as it could be a massive boost to its ad business.
3. Following the "battle" that matters most
Roku certainly doesn't have a monopoly; it faces stiff competition from some of technology's largest companies, including Amazon and Alphabet. But Roku continues to show well despite its much smaller size.
Recent data shows that it continues leading the United States with about 52% of the connected-TV market. While Amazon's Fire TV is competing well at 45%, investors shouldn't panic about Amazon's presence. The two companies recently extended their partnership with a multi-year agreement.
Investors should look outside the U.S. to see the real battle taking place. Companies are already competing for eyeballs in emerging markets, and this will be Roku's real test.
The company's efforts seem to be working; it has garnered 31% of the streaming market in Canada and has strong momentum so far in Mexico. The international audience could be the difference between Roku being a large company and an eventual titan in the entertainment industry. Time will tell where Roku lands on this scale and how much investors profit.