The Next 5 Years Could Be Even Bigger for Roku Than the Last 5 Years

Roku (ROKU 5.41%) quintupled its user base in the five years from 2017 through 2022, but the next five years could be even better.

The proliferation of streaming services has fueled the media-streaming technology expert's growth, but it's highly concentrated in the United States so far. Roku is the leading operating system in the United States for smart TVs and streaming devices, but lags behind several companies internationally. As Roku expands to new international markets and grows its market share in the ones it has, there is a massive business opportunity ahead of it.

Streaming is still in its infancy overseas

Streaming video is a much smaller share of TV time in many international markets compared to the United States.

Digital streaming accounted for over 34% of TV time in the U.S. in February, according to Nielsen's The Gauge report. By comparison, streaming took up just 15.2% of TV time in Mexico last December, Nielsen said. 13.9% of TV time in Brazil is a streaming service, according to Kantar. And Nielsen says just 5.9% of TV in Poland is streamed.

If you adhere to Roku's fundamental belief that "all TV will be streamed," there's a clear opportunity to gain share of a global market with lots of room for expansion. Even the U.S.'s 34% streaming share has plenty of headroom for future growth.

In order to take market share internationally, though, Roku expects to grow the same way it did in the United States.

The playbook works internationally

Roku has been slow to expand internationally, but it's done well in the markets it operates.

"We're growing share in every market that we currently participate in internationally," CEO Anthony Wood told analysts during Roku's fourth-quarter earnings call in February.

Roku follows a simple playbook: grow users, then increase engagement, and finally improve monetization. It's executed that extremely well in the U.S. with streaming hours and ARPU growing year over year every quarter.

Roku started in the U.S. with its streaming media players. It expanded to licensed smart TVs. Next, it introduced the Roku Channel -- a key mechanism for monetization and engagement. And now it's starting to sell its own smart TVs. Each step has strengthened its position in the market.

It's at various stages of that playbook in international markets. Canada and Mexico are furthest along with long-established Roku TV sales and robust content libraries on their respective Roku Channels. The U.K. also has a version of the Roku Channel, and Roku started selling smart TVs in the market in 2019. Brazil and Germany each have Roku TV programs as well, launched in 2020 and 2022, respectively.

Building the Roku brand around the world

While there's a lot of room left for market expansion, Roku is playing catch up with the competition in international markets.

Outside of the U.S., the connected TV market is dominated by Samsung, Alphabet's Android TV, and LG's WebOS. But Roku's making progress in taking share in its established markets. Guggenheim analyst Michael Morris expects Roku's user base to skew internationally over the next few years, with strong growth in Mexico, Germany, and Brazil.

As Roku establishes a greater presence in more countries, it should be able to build a beachhead in multiple regions and start building momentum. With so many households yet to fully adopt streaming in international markets, Roku has plenty of opportunity to win customers over.

It'll need to continue to show success replicating the U.S. playbook to get there though, and it needs to continue adding new countries. That will take significant capital, but as long as Roku shows a positive return on invested capital, investors should be pleased with the continued expansion of the Roku TV program and the Roku Channel.

The massive market opportunity

International markets remain a massive opportunity for Roku, especially as streaming adoption increases around the world with the continued proliferation of new streaming services.

Over 90% of TV households are located outside of the United States, along with the majority of TV ad spending. It's unlikely Roku will ever reach a level where 90% of its users are in international markets, but proper execution abroad could push it to 50% or even two-thirds. Netflix, for reference, counts over two-thirds of its subscribers from markets overseas.

Not only do international markets have strong potential for user growth, they could produce even stronger revenue growth over time. Many international economies are expected to grow faster than the U.S., providing ad-based revenue growth.

Despite surpassing 70 million users in 2022, Roku's just getting started growing its user base. The next five years could be even bigger for the streaming company.