In the ever-evolving and increasingly overlapping worlds of streaming media and digital advertising, Roku (ROKU +2.66%) stands out as a beacon of innovation and resilience. Despite facing a struggling ad market, followed by an uneven recovery, the company has demonstrated a remarkable ability to navigate these choppy waters.
With the stock down a staggering 81% from its all-time highs in the summer of 2021, the time to act is now. Let me tell you why I see signs of true long-term greatness in Roku's improving ad business.
Roku's resilient ad strategy
The deeply impaired ad market is getting back on its proverbial feet, thanks to a healthier global economy. Most of the inflation crises of 2022 are going away (with a few notable exceptions), and the big-spending ad buyers of yesteryear have marketing budgets to work with again.
That's good news for Roku, but hardly a surprise. Roku's ad-sales rebound was always going to happen.
For instance, Roku's Q3 2023 earnings call revealed meaningful year-over-year growth in ad spending through automated third-party demand sources such as Criteo and The Trade Desk. These advertising funnels help advertisers optimize their marketing budgets and send ad content to the right consumer-facing channels at the right price -- and Roku is a leading destination for these helpful business boosters.
It's cool to see robust recovery signs in the real world, right? That's especially true when you have some serious skin in the game, and Roku is one of my largest positions.
NASDAQ: ROKU
Key Data Points
The durable shift from traditional TV to streaming services
Roku CEO Anthony Wood highlighted the seismic shift from traditional TV to streaming, a transition involving a massive $60 billion U.S. TV ad market. With its scale nearing half of the U.S. broadband households, the company is uniquely positioned to make the most of this transition. Its rich collection of user data and growing portfolio of unique ad products are vital assets in attracting a larger share of these migrating ad dollars.
"It's all going to move to streaming, and there's going to be multiple winners," Wood said. "Our platform obviously has significant scale, engagement, first-party data, unique ad products."
Hence, few entertainment businesses are poised for greater growth than Roku as ad-based streaming services rise to prominence around the world.
The future of ad-supported streaming
On that note, Wood also touched on a paradoxical trend. As traditionally ad-free services such as Netflix and Amazon Prime Video start incorporating ads, their interest also benefits Roku. The shift in the streaming landscape not only increases advertiser interest overall, but also elevates existing ad-supported services like the Roku Channel.
"As popular streaming services make the trade-off to add ads, it levels the playing field in viewers' minds to services like the Roku Channel, which are already ad-supported," Wood said.
So it's a more level playing field, where ad-supported services, like the Roku Channel, may not be seen as cut-rate options of potentially lower quality. It's an interesting theory and should be obvious within the next couple of years how it plays out in reality.
Navigating a Variable Ad Market
The ad market's variability presents challenges, with ad purchases running uncomfortably close to air dates and an uneven order recovery across different industries. Chiefly, the crucial media and entertainment sector is lagging behind stronger rebounds in consumer staples or health and wellness, hamstrung by last year's writer's and actor's strikes.
However, Roku's proactive approach to forecasting and adapting to these market conditions showcases its resilience and strategic foresight. Media-sector softness can be managed with strong sales elsewhere, and 2025 looks particularly promising.
The aftershocks of the Hollywood strikes should be done and over by then, and it'll be the first year without game-changing sporting events like last year's soccer World Cup and this summer's Paris Olympics. The year-over-year comparisons should look great in 2025 as millions of consumers lean into media-streaming entertainment, instead.
That low stock price opens a buying window. Image source: Getty Images.
How Roku stands apart from sector peers
Roku showed an impressive 22% year-over-year growth in global viewing hours in the third quarter. That's a stark contrast with the 15% decline in the American market's linear hours (cable, satellite, and broadcast TV). This significant gap further underscores Roku's growing dominance and appeal in the streaming space. The company is stealing viewers from the old-school media sector, with the help of friends like Amazon and Netflix.
Netflix and Amazon are also great entertainment-sector investments, and I think they're solid buys at almost any price. However, they can't compare to Roku's deep-discount stock price -- their swoons from all-time highs are less than 20% these days. And Roku is a more direct play on the digital ad market's ongoing recovery. Ad sales are an essential part of Roku's business plan, while Netflix just dipped its first toe in the ad-based market, and Amazon is more of an ad buyer than a seller so far.
If you expect a skyrocketing return to healthy ad sales, the future of online streaming should enjoy huge benefits from that market trend. In my humble opinion, Roku's deeply undervalued stock is the best way to capitalize on this opportunity.
