From its initial public offering in September 2017 to its all-time high in July 2021, Roku (ROKU 1.38%) stock skyrocketed more than 20-fold, a ridiculous return in less than four years. But like many growth-tech stocks that surged throughout the pandemic, it hasn't been a fun ride over the past couple of years. As of this writing, the stock is down 87% since that peak price.
Shares have bounced back nicely so far this year. This momentum, coupled with a still-low valuation, could be enticing for some investors. To help you make a more informed decision, here are three things about Roku that the smartest investors know.
Roku is a three-sided streaming ecosystem
Most investors are likely familiar with companies like Netflix or Walt Disney -- popular content providers that offer direct-to-consumer memberships over the internet. Roku is a bit different from these streaming giants, though.
Roku is a three-sided streaming platform. On one side, it has content companies Disney and Netflix on its service. On another side, it has 71.6 million active viewers who want all of the seemingly unlimited content apps in one friendly user interface. Lastly, it has advertisers who want to target a wide audience in a connected-TV environment.
If you view Netflix or Disney as the supply, view Roku as the distributor. And Roku is in an advantageous position because it is able to grow on the backs of these content companies and their multibillion-dollar annual budgets. And it can avoid the so-called streaming wars entirely, not fighting for new subscribers. Instead, Roku tries to be an agnostic platform where viewers can find all their favorite shows and movies.
According to eMarketer, there are now more households in the U.S. that don't have a cable subscription than those that do. Looking ahead, Roku should keep benefiting from this powerful secular trend of cutting the cable cord and turning to streaming.
Hardware is not the key revenue driver
During the fourth quarter of 2017, just over five years ago, 55% of Roku's overall revenue was derived from the sale of its popular media sticks. This hardware was what initially put the business on the map. They could essentially turn any regular TV into a smart TV connected to the internet.
In the most recent quarter (Q1 2023, ended March 31), 14% of company revenue came from hardware, a huge reversal from a few years ago. Most of Roku's revenue now comes from its Platform segment, which consists of ad sales and subscription-sharing revenue.
Roku's strategy has always been to sell its hardware at a low gross margin in order to get its TV operating system into as many households as possible. And then the business could monetize viewership through its platform. Over time, though, as more revenue comes from ad sales and subscription sharing, which carry much higher margins, Roku's overall profitability should improve.
The Roku Channel is an important asset
An under-the-radar asset that investors might not be too familiar with is The Roku Channel (TRC). It is Roku's free, ad-supported television (FAST) channel that reached 100 million people at the end of 2022. It competes directly with the likes of Paramount's Pluto TV and Fox's Tubi.
TRC is important for Roku as it helps drive greater viewership because the content is free for consumers. Streaming hours on TRC were up 65% year over year in Q1, much faster growth than the 20% gain posted for the entire company. And it creates a flywheel effect.
FAST channels are rising in popularity, and the business is able to monetize this attention fully with ad revenue. This ad revenue can then be used to license even more content that can be offered on TRC, which will help attract more viewers and increase streaming hours.
