Although Roku (ROKU 0.57%) shares are up 51% since the start of 2023, a gain that benefited from the rise of the overall stock market, they're down a notable 33% this year (as of May 17). Investors weren't too happy with the guidance that management provided in the latest financial update.
As this growth tech stock sits 87% off its all-time high, investors who are bullish on its prospects might have this business on their radar. If you need a nudge, consider a little-known fact that might make you believe Roku is a no-brainer buy.
Mind the gap
One of the biggest tech trends in the past decade has been the rise of streaming entertainment. Drawn to low prices, unlimited viewing options, and the convenience of being able to watch whenever you want, consumer attention started moving away from cable TV. More than half of all households in the U.S. have now cut the cord.
This has implications for the advertising world. Marketing executives want to target engaged audiences, but these eyeballs are looking elsewhere. Consequently, there remains a huge gap between the time people spend watching streaming TV versus the amount of ad dollars that flow here.
According to data from Nielsen, people in the U.S. spend 50% of their daily TV viewing time watching streaming entertainment. However, only 22% of TV ad budgets are directed to this audience, according to data from eMarketer. To be clear, this data is from two years ago, but I think the same story holds true today.
Anthony Wood, Roku's founder and CEO, certainly thinks that this gap is going to close over time. That's not hard to believe. With its leading advertising platform and popular media sticks, this company is ready to capture that growth. The fact that it aggregates the unlimited number of streaming services out there, while giving advertisers the ability to target this connected TV (CTV) audience, speaks to Roku's value proposition.
And now, with more live sports starting to move to streaming services, that ad spending gap could start to close rapidly.
Beneficial position
The ongoing shift of ad dollars from traditional TV to streaming TV should provide a nice tailwind for Roku to continue growing not only its platform revenue over time, but also its hardware sales. This gives me confidence in the company's prospects over the very long term.
Roku is the leading smart-TV operating system in the U.S., Canada, and Mexico. Consequently, it's in a prime position to benefit.
But that doesn't mean the journey is going to be easy. There is immense competition in the space. Big tech heavyweights Amazon, Apple, and Alphabet have their own streaming TV operating systems as well as their own streaming services. And they all have a much bigger presence in the digital ad industry than Roku.
When it comes to the streaming industry more specifically, Netflix is a pure-play enterprise that is poised to benefit as well from more ad dollars moving to CTV. The business said that it now has 40 million subscribers to its ad-based tier. And it was just announced that Netflix purchased the right to show the Christmas Day NFL games.
Roku's wide reach, with 82 million active accounts that streamed 31 billion hours of content in the first quarter, means it is still in a favorable position, despite the other deep-pocketed industry peers all trying get a piece of the action.
With shares down well off their peak and trading at a historically cheap price-to-sales ratio of 2.4, Roku stock looks like a no-brainer buying opportunity, but only if you're willing and able to hold on for the next five to 10 years.
