As a leading aggregator of streaming content, Roku (ROKU 1.29%) stands to profit as more consumers ditch their cable bundles for internet-delivered entertainment offerings. Yet risks remain, including formidable rivals that are battling to secure their share of this lucrative market.
Here are three things investors who are considering an investment in Roku will want to know, as well as some risks to keep in mind.
1. The connected TV market is set to boom
According to Roku management, the company's business is built upon a simple premise: "All TV will be streamed, and all audiences, content, and advertising spend will follow." The TV market is rapidly moving in this direction, and the ad market is sure to tag along.
Here's why: 85% of U.S. households now own at least one internet-connected TV, according to Ark Invest. Yet the connected TV (CTV) advertising market currently only accounts for about a quarter of total U.S. TV ad spending. Ark Invest's analysts expect this gap to narrow, as companies shift their marketing investments from traditional TV to streaming services.
These trends bode well for Roku, and they're already helping to boost its growth. Roku added 9.9 million customer accounts in 2022, which brought its total to 70 million active accounts. Collectively, these customers viewed more than 87 billion hours of streaming content.
Ad dollars chase eyeballs, so marketers are migrating their spending to Roku's ad network. The company's platform revenue, which includes ad sales, jumped 20% to $2.7 billion last year. Roku gained market share, outperforming both the traditional TV advertising market and the overall ad market in the U.S.
2. New products and partnerships should fuel Roku's expansion
Roku already possesses the top-selling smart TV operating system in the U.S., where its 38% market share exceeds that of its two closest competitors combined. But rather than rest on its laurels, Roku is launching its own line of smart TVs to capture an even larger share of the industry. Its plan is to deliver a top-tier consumer experience by integrating its best-in-class streaming software with innovative hardware features, such as voice-controlled remotes and premium audio systems. It's a bold strategy that could help to widen Roku's lead over its rivals.
New partnerships should also help to propel Roku's growth. Best Buy is selling Roku's new TVs in its stores. The electronics retailer is also sharing its shopper data with Roku to strengthen its ad-targeting capabilities. Meanwhile, Roku's deals with Warner Bros Discovery, AMC Networks, and other streaming service providers are bolstering its content library.
3. Roku's stock is priced at a discount
Long-term viewership and advertising trends are clearly working in Roku's favor. But inflation concerns and recession fears weighed on its results in recent quarters, as marketers temporarily pared back their ad spending. Roku's stock price, in turn, is down sharply from its highs.
Enterprising investors spotted the opportunity to scoop up shares at bargain prices. Roku's stock price is already up over 50% so far in 2023. Yet it's still down more than 85% from its all-time highs in 2021, so plenty of potential gains could lie ahead.
Ark Invest is among the most bullish on Roku's prospects. The investment firm's analysts think Roku's shareholders could enjoy returns of more than 800% by 2026, driven by strong customer and revenue growth.
Risks for investors to consider
Despite its exciting growth potential, no investment is without risk. That's true for Roku, which is facing intensifying competition.
Alphabet is ramping up the number of free streaming channels it offers as part of its Google TV offering. And Amazon, another powerful force in the digital ad industry, is expanding its lineup of smart TVs in a bid to increase its market share.
Investors should not overlook the threats posed by these formidable challengers. But this is a large and rapidly growing market -- BMO Capital estimates that CTV ad spending could approach $100 billion in the U.S. alone by the end of the decade. So there's likely to be more than one winner within it. And Roku is well-positioned to be one of them.