Following a sharp fall last year amid inflation and a weak advertising market, shares of Roku (ROKU) have rocketed 73% higher in 2023. The leading streaming aggregator is still reporting weak revenue. However, investors are already discounting a possible near-term recovery in the ad market, which is how Roku makes most of its money.
Despite increasing competition, Roku maintained its lead in the connected TV market. Here’s how the company is positioned for more growth once the ad market recovers.
Roku has the viewers and data
Recent estimates from Pixalate have Roku controlling a dominant 50% share of the connected TV market in North America. While Roku reported just a 1% year-over-year increase in revenue in the first quarter, its active accounts grew 17%, ending the period just shy of 72 million.
Roku looks at active accounts as a proxy for households, so factoring in the average number of people per household, the streaming platform has many more actual viewers. That is up there with leading streaming services like Disney+ and Netflix. This large viewership makes Roku’s platform attractive to prospective advertisers.
With Netflix and other services rolling out ad-supported streaming plans, it’s possible the ad market could recover sooner than later as advertisers start moving ad spend from traditional TV networks toward digital platforms. The connected TV advertising market is estimated to double to $40 billion by 2027, according to Statista.
Regardless of when the market recovers, Roku is getting ahead of the curve to make its platform more advertiser friendly.
Earlier this year, Warner Bros. Discovery inked a deal with Roku to put more of the entertainment company’s free ad-supported streaming TV (FAST) channels on Roku’s platform. Roku has seen the number of streaming services offered on its platform grow overall, which should increase the number of hours people spend on the platform.
More content on its platform does a couple of things for Roku’s business. It causes users to spend more time looking for something to watch, and that time spent flipping through the options spells more opportunities for advertisers to display an ad in front of millions of highly engaged viewers.
Roku also owns valuable user data about what consumers do on the platform. Some analysts question why the company doesn’t sell its data to third parties to generate extra revenue. But this might be too short-sighted.
Management’s view is that this data has long-term value and is best utilized internally by helping third-party brands maximize the value they get out of their investment in Roku’s platform.
The company is leveraging its data through a partnership with Best Buy to help the retailer better measure and target audiences on the streaming platform using its shopper data.
Roku’s OneView ad-buying platform can also help brands deliver shoppable ads to viewers, where the consumer can checkout and pay for a product over the Roku platform. Last year, Roku announced a partnership with Walmart as the exclusive retailer to enable this e-commerce capability.
The stock has room to run
With these recent moves, it’s understandable why the market is bullish on the stock right now. Roku has the viewership and brand ubiquity to win a healthy share of the burgeoning digital advertising market.
However, the near-term macro environment is still causing many advertisers to pause their spending. Investors who decide to pull the trigger will likely have to tolerate further volatility in the share price, but this uncertainty is also why the stock is trading at a compelling valuation.
Despite the stock’s recent climb, it still has a relatively low price-to-sales ratio of around 3, which is an attractive valuation compared to where it traded historically. Given Roku’s dominance in the connected TV market, the stock appears significantly undervalued from a long-term perspective and remains a promising investment opportunity.
— John Ballard
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Source: The Motley Fool