Roku (ROKU 0.15%) updated investors on how fiscal 2022 is turning out. The streaming player and software platform company released first-quarter earnings after the markets closed on April 28. There were several exciting figures to digest in the report, but one stood out above all others.
In the shareholder letter that accompanied the release, Roku said, "In Q1, the top 10 broadcast TV advertisers increased spend on Roku nearly 80% year over year, while spending 7% less on legacy pay TV."
Let's dive into why that impressed me and look at other key figures from the Q1 earnings report.
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Advertisers like the return on investment Roku's platform offers
The fact that the top 10 advertisers are boosting spending by 80% on Roku is a big deal. It suggests that the marketers are getting an incredible return on their investment. If that were not the case, it is unlikely they would boost spending to such a large degree. Streaming content has long been known to be more convenient for consumers.
A subscription to a streaming service can be viewed on a home TV, a smartphone, a tablet, and a laptop -- basically, anywhere you can get an internet connection. That's a considerable improvement from cable TV, which you are stuck watching on a home or office TV. To make the case for cable worse, it is often more expensive, and you are forced to pay for a bundle of channels, many of which you will never watch.
Streaming TV is producing valuable advantages for advertisers as well. Roku can collect vast data on viewers and integrate this first-party data into its advertising platform. In contrast, marketers need to rely on third-party data to determine who is watching what program on cable TV and how long. The third-party data is less reliable and leads to advertising waste. An ad for a steak restaurant shown to a vegan is likely wasted spending.
ROKU Revenue (Quarterly) data by YCharts.
In addition to increased spending by the top 10 advertisers, Roku retained 96% of marketers that spent over $1 million on the platform, and average expenditures among that group increased by more than 50%. It's an excellent sign for Roku and its investors that marketers are experiencing an excellent return on their investment. If spending on ads on Roku brings the required return on investment to businesses, they will keep ramping up that spending. The trend has boosted Roku's revenue and will likely continue to fuel growth for several more years.
The long-run impact for Roku investors
In the near term, Roku faces headwinds from supply-chain shortages. The constraints are raising prices for its player units and its manufacturer partners, making it harder to Roku to add customer households. Those factors, along with the market's distaste for unprofitable growth stocks, have the stock down 78% off its highs. The sell-off has Roku trading at a price-to-sales multiple of 4.9, near its lowest in the last five years.
ROKU PS Ratio data by YCharts.
Nevertheless, Roku's long-term prospects remain intact. If anything, the results from this quarter that showed the insatiable demand from advertisers only makes its prospects more compelling.
