Everyone knows Roku (ROKU 5.87%) for its hardware devices that allow TVs to stream video content from the internet. However, the true value of this company is in its software. And in February, Roku announced a new partnership that really shows just how valuable it can be.
There are valid questions regarding Roku as a long-term investment. However, this company has a great chance of creating shareholder value. Let's take a closer look at why that's the case.
Don't overlook Roku's deal with Cox Automotive
On Feb. 1, Roku partnered with Cox Automotive, which owns several different car brands, including Autotrader and Kelley Blue Book. These platforms are essential for many consumers when researching cars to buy and discovering how much vehicles are worth. According to Cox Automotive, over two-thirds of people researching vehicles online use one of its platforms at some point.
Roku primarily generates revenue when people are shown an ad while streaming video content. Advertisers want to be on Roku's platform because there are over 70 million active Roku accounts.
The great thing about programmatic advertising on Roku, in general, is that certain user demographics can be targeted. But measuring the effectiveness of an ad campaign is more challenging -- which is where Roku's partnership with Cox Automotive comes in.
With this latest deal, car companies can advertise on Roku the same as always. However, Cox Automotive's platforms will now track which Roku users are responding to the ads. This can make car companies spend more money where the data says that ads are working. Moreover, if Roku can prove the merits of its technology, it can potentially charge higher rates.
For what it's worth, Roku is the only streaming player partnered with Cox Automotive in this way. And it's potentially a game-changing value proposition for car companies looking to make their ad dollars count.
This new deal builds on past achievements
Roku's partnership with Cox Automotive reminds me of previous deals with Walmart and Kroger. With the Walmart deal, brands can make their Roku ads shoppable. Roku ads that are integrated with Walmart give consumers the option of buying with just a click from their TV remotes. After clicking "buy," account information in Roku is used to process the order.
The Walmart deal provides advertisers with instant feedback on Roku ads when users click. However, Roku's deal with grocery-chain Kroger appears to go a step beyond the Walmart integration. Kroger has its own data for marketing called Kroger Precision Marketing. This integrates with consumer information housed in Roku's OneView platform. By combining the two, the effectiveness of ads on Roku can be reliably measured when they lead to sales at Kroger.
Is Roku stock a buy?
When I look at Roku's technology, I have little doubt that it's capable of value creation over the long haul. One question that I still have today, however, is how much money will it burn as it grows?
ROKU Operating Income (TTM) data by YCharts.
Roku will report financial results for the fourth quarter of 2022 on Feb. 15. But through the first three quarters of 2022, the company has already reported an operating loss of nearly $281 million.
Roku's management has been forthright with its strategy: Its plan is to do whatever is necessary to grow active users on the platform, positioning itself for profitability at maturity.
To illustrate just how far Roku's management is willing to take this strategy, consider that its hardware revenue had a negative 19% gross margin in the third quarter of 2022. In other words, it sold its devices for less than it cost to make them. The goal was clearly to sell as many as possible to get people into the Roku ecosystem.
The company is doubling down on this strategy by launching its own line of smart TVs and other smart-home devices, like video doorbells. I fully expect the company's losses to grow, as long as its strategy of growing its user base via hardware devices remains in place.
Roku stock could lag the market as long as hefty losses mount. That said, I still believe the company is building something very valuable for advertisers, which provides ample opportunity for high-margin revenue growth over the long haul.
Looking at Roku's hardware strategy, I acknowledge the road ahead could be bumpy. But I remain invested in the stock because I see tremendous value in its software.
