When it comes to streaming platforms, Roku (ROKU -3.96%) is in a class by itself. The company pioneered devices that made connecting to streaming providers a breeze, aggregating more than 10,000 streaming channels in one place. Unfortunately, Roku wasn't immune to the recent economic headwinds that crushed advertising spending, causing the company's growth to grind to a halt.
Roku's latest move could be one of its biggest yet, providing one more catalyst to accelerate the company's rebound and reignite this once-compelling growth story.
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On Tuesday, Roku announced "a first-of-its-kind partnership" with e-commerce platform Shopify (SHOP -1.81%). Viewers can purchase products from Shopify merchants with several clicks of the remote via Roku Action Ads.
When a viewer sees an ad from a participating Shopify merchant, they "can simply press OK on their Roku remote" for more information about that product. If interested, users can purchase the product using their remote and Roku Pay, the company's payment option. They follow prompts on the screen to make a purchase before returning directly to their streaming content.
Roku noted, "This unique experience shortens the advertising funnel from brand awareness to purchase on the largest screen in the home." The press release went on to highlight Roku's vast repository of "customer data and insight," which will be a keen benefit to Shopify merchants participating in the program.
Size matters
To appreciate the significance of this move, it's important to understand just how Roku makes money.
While it's best known for the set-top boxes, dongles, and smart TVs that make accessing streaming services a snap -- that hardware isn't the primary source of Roku's revenue. The lion's share of its top line comes from the digital advertising that appears on its platform, which leverages the company's growing audience.
Historically, that approach has been wildly successful. Roku added 10.3 million active accounts to its audience over the past year alone, totaling 71.6 million.
For context, there were roughly 60 million cable and satellite customers at the end of the first quarter, according to Leichtman Research Group. That means Roku's audience is larger than all the major cable providers combined. Furthermore, while Roku continues to grow, cable viewers are defecting in record numbers. In the first quarter, the industry shed another 2.2 million subscribers -- the largest such losses in a quarter ever.
Having one of the largest captive audiences gives Roku tremendous bargaining power and leverage with advertisers -- and this latest move increases that advantage. Not only is Roku able to target the customers most likely to purchase the products in question, but it also allows them to buy those items on the spot, capitalizing on impulse purchases.
A guaranteed audience
It isn't surprising that Shopify considers Roku its partner of choice, given the reach of its platform. The press release noted, "Shopify advertisers receive more customer data and insight into purchasing trends, plus point-of-sale access to Roku's audience, marking a major milestone for Roku's ongoing commerce partnership with Shopify."
One of the company's initial partners is Ergatta -- the maker of game-based connected rowing machines cited the ability to "[meet] our target customers where they are, and [provide] a seamless path to purchase," according to Saaj Parikh, Ergatta's Director of Marketing, a "no-brainer." Another draw is Roku's scale, which is unmatched.
It's only a matter of time
The recent economic headwinds are beginning to diminish. The marketing business suffered during the downturn as advertising is an area of the budget that's easy to scale back or ramp up as market conditions require. History suggests this phenomenon is typically short-lived. Meanwhile, the tailwinds that could fuel Roku's rebound are rising:
- As the economy recovers, advertising will rebound, increasing Roku's revenue.
- Cord-cutting shows no signs of slowing and is actually accelerating. Roku makes it easy for these viewers to join the fold.
- Advertising continues the secular shift from traditional television and cable providers to connected TV and ad-supported streaming, and Roku will be one of the principal beneficiaries.
Finally, as economic challenges have pounded Roku's stock price, there's been a corresponding reset in its valuation. The stock is currently selling for less than 3 times next year's sales -- near the lowest multiple in Roku's history. Given the growing list of catalysts, the time to buy Roku is now.
