As the undisputed leader of streaming platforms, Roku (ROKU 0.15%) was once a Wall Street darling. But the combination of slowing growth, a pullback in marketing spending, and fears regarding a potential recession have sent investors running for the exits, concerned that the company's best days are in the rearview mirror.
Yet Roku just made a move that could put another nail in the coffin of cable TV and return the streaming pioneer to its former glory, reigniting its growth, and positioning the company for future success.
Image source: Getty Images.
Size matters
First, let's clear up a common misconception regarding Roku. While the company is best known for the dongles, set-top boxes, and smart TVs that provide easy access to its streaming platform, that's not how Roku makes most of its money (more on that in a minute). Management has made the strategic decision to sell its namesake devices at or near cost in order to bring viewers into its ecosystem.
That approach has been wildly successful, as Roku added 10 million active accounts to its viewing base over the past year alone, bringing the total to 70 million. For context, it's estimated there were just 66 million cable subscribers at the end of 2022, and that number is in a rapid and continuing secular decline, the result of the ongoing cord-cutting trend.
Roku makes the lion's share of its revenue from the digital advertising that appears on its platform. In fact, the company has roughly 10,000 channels on its platform. While a few have subscribers who pay to forgo advertising, the vast majority are free, ad-supported TV (FAST) channels, which cede a percentage of their ad space to Roku in exchange for streaming on its platform.
Having one of the largest audiences in the country gives Roku a tremendous amount of bargaining power with advertisers -- and the company just made a brilliant move to further leverage this advantage.
A guaranteed audience
Traditional television advertising is purchased in two distinct periods. The up-fronts are ads purchased well in advance of a show being aired, while ads on the scatter market are purchased closer to when a program airs. The up-front season is fast approaching, and Roku has extended an offer to advertisers that makes it a much more compelling alternative.
Roku just introduced its Primetime Reach Guarantee, which will give the company an edge compared to advertising on cable. In a press release, Roku said, "Advertisers can reach more TV households in primetime with Roku than the average program on a top-five cable network on traditional TV."
The company also said the guarantee "brings a key benefit of cable advertising to TV streaming advertising." Advertisers first select a date, it said, and "Roku then prioritizes delivery to unique households across The Roku Channel and the additional top 100 channels on the platform."
In a pilot program, Roku said it was able to reach 15% more households "than an average program on a top-five cable network."
This provides advertisers with assurances that they will reach their intended audience numbers. Perhaps more importantly, Roku has detailed data about those viewers on its platform, which will help better target the users most likely to make a purchase as the result of the ad.
The shifting ad market
The proliferation of internet-connected TVs (CTV) is playing right to Roku's strength, as marketers continue to shift advertising dollars to follow the audience. CTV is now the fastest-growing video channel, according to a report released by the Interactive Advertising Bureau. Marketing spend increased 57% to $15.2 billion in 2021, and it's expected to have grown another 39% to $21.2 billion, once the final numbers for 2022 have been compiled.
It gets better. While CTV accounted for 36% of viewing time in 2022, ad-spending hasn't kept pace, with just 18% of video ad dollars allocated to CTV. As the shift of ad dollars continues, Roku is well-positioned to reap the financial rewards.
Roku's tailwinds are getting stronger
The current economy has marketers pulling back on their advertising spending, but this is only a short-term situation. Meanwhile, the tailwinds that will drive Roku are mounting:
- As the economy begins to recover, marketers will open the spigot, and advertising dollars will begin to flow once again, increasing Roku's fortunes.
- Cord-cutting will continue, with larger audiences turning to Roku for in-home entertainment.
- As marketers continue the ongoing the shift from linear and cable television to CTV and ad-supported streaming video, Roku is positioned to collect a growing share of those ad dollars.
There's one more reason investors should be keen to buy Roku. The stock is currently selling for just 2 times forward sales, making it a bargain.
That's not to say it couldn't get cheaper over the next few months; it certainly could. However, given the difficulty in calling a bottom and the growing list of potential catalysts, the time to buy Roku is now -- before Wall Street realizes its mistake.
