The rapid rise of TV streaming platform company Roku has been difficult to ignore in the last year. Since going public, Roku has demonstrated market expansion and execution excellence, while lowering competitive risk and capital intensity through its strategic positioning as an “over-the-top” (OTT) takeover target and disruptive business model. With its continued growth, it is likely that larger companies such as Amazon or Google may be circling for a potential buyout.
Roku is currently trading at $70 per share with a market cap of $7.75B. Since going public last September, Roku’s stock price has tripled, and we project that it will continue to grow. Roku is currently undervalued because the market fails to fully appreciate the disruptive nature of its platform play and underestimates the transition to streaming that will ignite the growth of the TV OS software industry, in which Roku would be a leading player.
Roku provides users with access to various OTT content, while enabling content providers to build and monetize large audiences and advertisers to engage with users. Roku generates revenue in two main ways: 1) through sale of its streaming players and Roku TVs and 2) monetizing their platform business through advertising, content distribution and licensing, and audience development. However, Roku’s key strategy is positioning itself as a content aggregator while focusing on growing its platform business, with the prior mainly employed as a user acquisition tool. As of the end of the most recent quarter in 2018, Roku generates the majority of its revenue from their platform business.
Video-entertainment devices are expected to grow rapidly as well, with a forecasted 36% five-year compounded annual unit shipment growth rate through 2022, which outpaces other smart home device types. The market in which TV content is fully delivered via streaming is not so far-fetched. The TV streaming industry is expected to expand at a CAGR of 15.6% from 2018-2028 with the OTT segment of the content delivery channel expected to dominate the market. According to Morgan Stanley, there were 120 million aggregate OTT subscriptions by the end of 2017 in the US, evidence that TV streaming is becoming more mainstream. In addition, with the implementation of new 5G wireless technologies that promises faster data transmission, TV content can be streamed without interruption from home to mobile, which already makes streaming much more compelling than traditional cable delivery. All these emerging factors power the transition to TV streaming, providing fertile ground for Roku to position itself as the leader of the TV OS platform business through its innovative platform play.
Roku is indeed capitalizing on the overall TV streaming industry growth as well as quickly expanding its own share of the market through its growth of its platform business, which has seen a 96% YoY increase to $90.3 million in revenue as of Q2 in 2018.
Roku not only demonstrates significant growth potential, but also the ability to maintain that growth: Its strategy? 1) Acquire users through the sale of their hardware and TV OS licensing. 2) Retain users by offering greater free content with more selection. 3) Collect more data from the growth of active users, which allows for more effective targeting and higher ad revenue. Its tactics? Roku channel and expansion of their licensing program.
Through the use of Roku Channel, which presents a greater selection of free content, Roku has increased user engagement and hours streamed by enabling content to be more accessible and discoverable. Consequently, more data has been collected for advertisers and content providers to more effectively target their users, growing ad revenue and ultimately average revenue per user (ARPU), which has seen a 48% YoY growth from $9.28/user in Dec 31, 2016 to $13.78/user in Dec 31, 2017. Measured by the total hours streamed, Roku operates as the number one TV streaming platform in US. The increasing hours streamed is also a key metric indicating the shift to streaming in the TV industry.
The way Roku has acquired its current 22 million active users (with a 45% YoY growth) is two-fold: offering its players at a low retail price that attracts new customers and establishing licensing partner relationships with TV brands and service operators, the greatest source of customer acquisition to date and a powerful tool that will be an eventual revenue generator.
Roku has predicted the role OS licensing will play as the transition to streaming becomes more prevalent, with the increase in demand for TV OEMs to start deploying streaming software on their hardware. Having already licensed their software to TCL, one of the largest TV OEMs in the world, the expansion of Roku TV licensing program has led it to become the current leader in TV OS licensing in the US. Roku’s revenue will continue to grow from these mutually beneficial partnerships as long as TV OEMs use Roku’s software.
Due to Roku’s innovative core technology and platform strategy, it may benefit many companies strategically, particularly those that are betting on video streaming. Roku took over a decade to build its platform and is continuing to do so today. Because time-to-market is so mission critical, larger companies would benefit more from buying Roku and leveraging their OS and already existing user base rather than spending years developing their own platform. For example, Amazon would easily broaden its position by leveraging its video customers already built through Prime Video and Fire devices. Roku also benefits from the potential buyout given that they no longer have to compete with bigger players in the industry like Google or Amazon who already have OS streaming software. Furthermore, as smart TVs get cheaper and more prevalent in homes, the demand for Roku TV players will decrease because customers can stream online content via TV directly. Given the decline in hardware sales, Roku would no longer need to develop their player segments and can instead focus their energy improving their core technology and growing their user base.
Overall, Roku demonstrated growth, innovative platform play, and diversified revenue streams along with the growing streaming industry puts it in a prime position as a potential buyout by some of the biggest media and tech companies.