Roku (ROKU 5.20%) has grown so quickly that it's easy to think it has reached its full potential. That couldn't be further from the truth. Roku has a massive opportunity ahead to fuel years of revenue growth for the streaming content enabler.
Management expects all content to be streamed eventually. However, many folks are still getting their content through cable, satellite, or broadcast connections. Moreover, advertisers have been slow to shift their budgets from the latter to the former.
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Market forces are working in Roku's favor
In the conference call that followed Roku's first-quarter earnings release, CEO Anthony Wood revealed some figures that highlighted Roku's growth potential: "Today 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."
The statistics highlight that while Roku has grown revenue from $399 million to $2.765 billion between 2016 and 2021, it still has a long way to run higher. If the CEO is right that all TV will eventually be streamed, then ad budgets allocated to connected TVs could rise more than fivefold from the current 18% mentioned above.
ROKU Revenue (Annual) data by YCharts.
Interestingly, in 2021, advertisers spent $763 billion globally. That was 22.5% higher than in 2020. A significant portion of that budget is moving to digital channels -- 64.4% in 2021 from 52.1% in 2019. Digital advertising delivers a higher return on investment due to targeting and measuring benefits.
On the other side of the equation, streaming services offer consumers greater convenience at a lower price. Folks can use a streaming service anywhere they can take their phone. That's in stark contrast to traditional cable or satellite service that requires a physical connection. The restrictions mean people can only take advantage of the service at home or in the office. To add insult to injury, cable and satellite providers typically ask viewers to sign long-term contracts with heavy penalties for canceling early.
So Roku is experiencing tailwinds from both sides. Advertisers are moving their budgets to digital channels while consumers switch from legacy providers to streaming.
Roku's massive potential is no secret
Roku's incredible long-term prospects are no secret to the market. Its stock is trading at a price-to-free-cash-flow ratio of 78 and a price-to-earnings ratio of 104. The expensive valuation takes into account Roku's long runway for growth. It hit an inflection point in 2021 by becoming profitable on the bottom line, giving investors another reason to love the stock.
ROKU P/E Ratio data by YCharts.
However, Roku has not been spared in the growth stock sell-off in 2022. The stock is down 56% year to date. While investors are confident in Roku's long-term prospects, they are concerned about how supply shortages are slowing its growth in the near term. If those forces bring Roku's stock down further, investors can start adding Roku stock to their portfolios.
