For the first time, streaming has overtaken legacy pay-TV in terms of adoption in the U.S. 65% of people aged 18 to 49 watched streaming TV in March 2022, more than the 63% that watched legacy pay TV.
The future of entertainment will likely see streaming become the prevailing choice, but how can Roku (ROKU -1.60%) capitalize on this? It has some competitive advantages that could allow it to be an amazing investment over the long haul if CEO Anthony Wood's vision comes to fruition.
Image source: Getty Images.
What is the future of streaming?
On the company's April 28 conference call, Wood said this about the opportunity that lies ahead for Roku:
In the U.S., Nielsen reports that audiences spend 46% of their TV time streaming, while eMarketer reports that advertisers spend just 18% of their TV ad budgets on streaming. Both of these will become 100% as eventually all TV and all TV advertising will be streamed.
It's a bold claim that all TV will be streamed in the future, but it sets up a pretty optimistic picture for Roku. Considering the company's streaming platform acts as a hub for audiences to toggle between their streaming services, if all TV entertainment shifted to streaming, Roku would likely see much higher activity -- and revenue.
Roku is the leading streaming platform in the U.S., Canada, and Mexico in terms of hours streamed. This dominance puts Roku in a great spot to capitalize on the industry's low advertising penetration. With more than 61 million active accounts and 21 billion hours streamed in the first quarter, and as advertisers shift their spending to streaming channels, Roku should be a top choice.
How Roku is poised for success
Being a top dog is already paying off. In the first quarter, revenue jumped 28% year over year to $734 million, despite supply chain shortages in the TV market. These challenges have made TVs more expensive, which slowed consumer purchases. However, Roku still saw a bump of 14% in accounts, despite these shortages, showing that consumers who are buying TVs and shifting to streaming are choosing Roku. This is another testament to the nature of Roku's leadership.
The company has plenty of competition. Big companies like Amazon and Apple offer their own streaming hubs, but these platforms are not as attractive to streaming services. The tech giants already have their own streaming offerings, which gives them an incentive to promote their own services over the competition. While Roku also has a channel, it is free, and the primary objective of its platform is to be a neutral hub connecting users to their streaming services.
TV manufacturers like VIZIO also have streaming software, but those competitors don't have Roku's scale. For example, Roku had more than five times the number of hours streamed on its platform than VIZIO had in the first quarter. Additionally, Roku generated $87 million in free cash flow during the quarter, which it could invest back into the business to attract even more customers and outpace the growth of some of these smaller players. This would allow the company to maintain its leadership and grow its appeal to advertisers.
What could shut Roku off?
The Roku Channel was itself a top-five channel on the platform in terms of engagement and reach in the U.S. during the first quarter.
This is another advertising revenue generator for the company, but it could put Roku in a bind when partnering with other streaming services. After all, they might be less willing to partner with Roku if they know it has a growing incentive to direct viewers to the Roku Channel instead of competing services.
That said, Roku has run into some of these challenges already. Comcast took a tougher negotiation stance with Roku when launching its Peacock service, yet they ended up reaching an agreement to include Peacock on Roku's platform. So while there is a risk here, Roku still enjoys substantial bargaining power thanks to its prominent place in the industry.
Otherwise, Roku has major tailwinds at its back with the ongoing shift of audiences and advertisers toward streaming, putting it in a great position to thrive over the long term. The company will have to balance the conflict posed by growth of the Roku Channel and its role as a "neutral" streaming platform.
With the stock trading at 4.4 times sales -- its lowest valuation since early 2018 -- Roku is a major bargain today.
