This year, streaming will account for about 50% of TV viewing time among U.S. adults aged 18 to 49, but advertisers will spend just 22% of their TV budgets on streaming platforms, according to eMarketer. That sizable gap will inevitably diminish for two reasons. First, consumers are cutting ties with traditional paid TV like cable and satellite. And second, connected-TV (CTV) ads can be targeted more effectively.
To that end, BMO Capital Markets estimates CTV ad spend in the U.S. will reach $100 billion by 2030, up from $21 billion in 2021. But the global opportunity is even bigger. Streaming will eventually account for the bulk of TV advertising, and global TV ad spend is expected to hit $344 billion by 2026, according to IMARC Group. Few companies are better positioned to capitalize on that opportunity than Roku (ROKU -0.79%).
Here's why.
The Roku operating system
Roku connects consumers with content publishers, allowing users to manage all of their streaming channels from a single platform. Roku-branded smart TVs and streaming devices have earned a reputation for affordability and reliability, and they inspire a high level of customer satisfaction, as evidenced by Roku's world-class net promoter score of 71.
That success is due in large part to Roku OS, the only operating system purpose-built for TV. Other vendors use modified mobile operating systems -- think Amazon Fire TV and Samsung Tizen OS -- but Roku built its platform specifically for television, and that tends to offer a better viewer experience. In the second quarter, Roku experienced fewer video start failures than competing platforms, and it tied for the lowest buffering rate.
Thanks to that competitive edge, Roku ranks as the most popular streaming platform in the U.S., Canada, and Mexico as measured by engagement. In fact, Roku's leadership in those markets is so extensive it actually powered 30.5% of global TV streaming time in the second quarter, according to Conviva, more than the next two vendors (Amazon and Samsung) combined. Roku also accounted for a market-leading 23.1% of streaming devices globally, while Amazon ranked second with 12.1% market share.
Why does that matter? A large and engaged audience is worth gold to advertisers, and Roku has the biggest and most engaged audience in the streaming industry. That should bring more ad dollars to its platform as marketers shift their budgets to CTV.
The Roku Channel
The Roku Channel is an ad-supported streaming service with thousands of free movies and TV shows, and hundreds of free live channels for news, sports, and entertainment. In the past, Roku exclusively licensed content from other publishers, but it started adding original content to the mix last year, and the early results are encouraging. The Roku Chanel ranked among the top-five channels on the platform in the U.S. in the first and second quarters this year.
Going forward, Roku sees its ad-supported service as the foundation of a powerful network effect. As strong viewer engagement drives ad revenue growth, Roku's ability to license and produce great content will improve. And as The Roku Channel becomes a source of top-tier content, its ability to engage viewers and generate ad revenue should improve.
More broadly, Roku's competitive advantage currently boils down to brand authority, but The Roku Channel could solidify its market position by making the platform a destination for great content. Investors should pay attention to its progress on that front.
Roku OneView and Roku Pay
Roku acquired ad-buying platform dataxu in 2019 and rebranded it as OneView. This product allows marketers to run targeted campaigns across CTV, desktop, and mobile devices. In other words, OneView allows Roku to monetize digital ad transactions even when it does not own the content and when that content does not appear on its platform.
Roku Pay processes transactions when viewers purchase premium content and subscription services, allowing Roku to take a cut of payment volume. But the company is putting the payment tool to more innovative uses. In June, Roku announced a partnership with Walmart that will bring shoppable ads to the platform, meaning viewers will soon be able to purchase products directly from ads that appear on the screen. If successful, Roku could literally revolutionize the TV ad industry.
Roku stock is a screaming buy
Macroeconomic headwinds have weighed on Roku over the past year. Consumers have cut back on discretionary purchases like smart TVs in response to high inflation, and brands have cut their ad budgets to account for softness in consumer spending. That led to disappointing financial results in the second quarter. Revenue climbed just 18% to $764 million, and the company posted a non-GAAP EBITDA loss of $12 million, down from a profit of $122 million in the prior year.
That weakness has spooked many investors, and the stock has plunged 85% from its all-time high. But growth should reaccelerate as the economic environment improves, and the long-term investment thesis is still intact. Roku is still the most popular streaming platform as measured by viewing time and total devices, meaning the company is already an important player in the CTV ad market. But continued investments in The Roku Channel and Roku Pay could further cement its market leadership and drive tremendous returns for shareholders.
Currently, shares trade for an inexpensive 3.3 times sales -- an absolute bargain compared to the three-year average of 14.9. Given the potential upside, this growth stock is a screaming buy.
