Stock Pick #2

Most of you reading this probably own a streaming media device. I’m willing to bet that a majority percentage of you with a streaming media device will likely own a Roku (NASDAQ: ROKU) – whether it be the Roku Express, Roku Ultra, Roku Premiere, or the new Roku Soundbar or Streambar. Roku has built a major brand and created an industry-leading product that is changing the media and entertainment industry for the better.

Roku Company Overview

Roku is the leading provider of streaming media hardware and software worldwide. Their products include streaming media devices such as the Roku Express, Roku Express Plus, Roku Premiere, Roku Soundbar, and Roku Streambar. They partner with many major TV manufactures who embed the Roku software into their TVs, providing great network effects and growth potential for the Roku platform.

Roku makes money via product sales as well as selling advertising space on their platform. While Roku has some pretty stiff competition such as Apple TV and the Amazon Fire TV, perhaps a major benefit of Roku is that it’s a universal platform for all devices and focuses just on its streaming media player and platform. Other products such as Apple TV and Fire TV are often only compatible with their own products and services.

In Roku’s own words:

“Roku pioneered streaming to the TV. Our mission is to be the TV streaming platform that connects the entire TV ecosystem around the world. Today, Roku streaming devices are used by millions of consumers in North America, Latin America and in parts of Europe including the UK, Ireland, and France. We connect users to the streaming content they love, and we enable content publishers to build and monetize large audiences and provide advertisers with unique capabilities to engage consumers. Roku is uniquely positioned with its sophisticated TV streaming platform and growing scale. The company operates the No. 1 TV streaming platform in the U.S. as measured by hours streamed (Kantar 2020).”

Roku.com ^[1]https://www.roku.com/about/company

Why Invest in Roku?

After much research and hours of binging on Netflix and other addicting streaming media apps (with my Roku Soundbar of course), here are the reasons I believe Roku is a great long-term investment.

Financials

A sound financial foundation can indicate a great potential investment opportunity – and Roku checks all the boxes I like to see. Some of them include the following financial highlights: ^[2]https://image.roku.com/c3VwcG9ydC1B/2Q21-Roku-Shareholder-Letter-Final-Version.pdf^[3]https://finance.yahoo.com/quote/ROKU/key-statistics?p=ROKU

• Quarterly revenue growth of 81.20% year over year
• Platform revenue growth of 117% year over year
• Gross profit growth of 130% year over year
• Over $2 billion in cash
• Debt that is less than their cash on hand – sitting at roughly $463.26 million in debt
• Roku’s earnings reports are notorious for beating analysts’ earnings estimates

Leadership

Their current founder and CEO is Anthony Wood – a serial entrepreneur with a history of success and innovation. Anthony was originally part of the Netflix executive team and spun off his idea to build a streaming media platform. As of right now, 88% of employees approve of Anthony Wood as the CEO. ^[4]https://www.glassdoor.com/Reviews/Roku-Reviews-E26760.htm

As a loyal customer of Roku, I own many of their products, most notably the new Roku Soundbar, a modern soundbar with a Roku streaming media player built in. The product is phenomenal, and the platform is simple and easy to use. However, there is a reason they hold over 35% of the streaming media market – because their product is the best.

In short, they have sound financials, growing revenue, a highly innovative CEO with a history of success, and an exceptional product. All of this spells out a great investment opportunity.

Roku’s Industry Moats

If my research shown in the fundamental analysis above isn’t enough to convince you, consider these additional reasons to invest in Roku:

• Large market opportunity #1: There is a vastly growing trend of businesses buying ads on streaming media platforms like Roku as compared to traditional tv ads. This introduces a continual growing market opportunity for Roku.
• Large Market Opportunity #2: I like to compare companies to major players in the industry or related industries. For Roku, I look at Netflix (seeing it was a spinoff of Netflix anyway). As of this writing, Roku is worth about $43.2 billion ^[5]https://finance.yahoo.com/quote/ROKU/key-statistics?p=ROKU, and Netflix is worth $267 billion and growing ^[6]https://finance.yahoo.com/quote/NFLX/key-statistics?p=NFLX. If Roku grows to anything the size of Netflix, we’re looking at possible 10x growth!
• The Roku Channel: Roku has it’s own channel – The Roku Channel – that provides free and premium TV. This channel currently reaches millions of people and is now offered on other devices like the Fire TV and Apple TV via AirPlay.
• Competitive advantage: Roku has multiple competitive advantages, with two major ones being it’s universal approach to streaming media and it’s exclusive TV manufacturing partnership deals in which manufacturers build their TVs with a Roku device built-in.
• First-mover advantage: While streaming media isn’t totally new since the age of the internet, Roku is the pioneer of an actual streaming media device for television and movies.
• Disruptive growth: Growth supported by growing revenue and strong financials often indicates that growth will likely continue. While many may start saying Roku is overpriced, keep in mind that Amazon was considered “overpriced” years before it reached a $1 trillion valuation. Bet on the winners, not the losers!
• Strong brand: What started as a cheap option to stream TV and movies seamlessly has grown into the go-to product that provides high-class media players, soundbars, and a data-driven technology platform – all of which has built powerful brand equity for the name Roku.
• Industry Leader: As of 2020, it controls about 38% of the streaming media market in the US and 31% market share in Canada. ^[7]https://www.roku.com/blog/roku-tv-os-announcement. Furthermore, Roku has a market share that is 36% higher than the next contender – Amazon’s Fire TV. ^[8]https://www.roku.com/blog/roku-number-1-streaming-tv-platform

Competitors

Roku’s current competition includes:

• Amazon (NASDAQ: AMZN) – Amazon Fire TV
• Apple (NASDAQ: AAPL) – Apple TV
• Google (NASDAQ: GOOG) – Google Chromecast
• Netflix (NASDAQ: NFLX) – Netflix’s streaming platform
• Nvidia (NASDAQ: NVDA) – Nvidia Shield streaming media player

When your competition includes at least three trillion-dollar companies, and you’re winning, that can pose both a major threat and a great success. Something to surely keep an eye on should one of those behemoth companies take charge.

Risks

With every investment comes risk. Among them may be reasons some might balk at investing in Roku. Consider the following risks:

• Competition: Roku’s biggest risk is its competition from Amazon’s Fire TV and the Apple TV. When you’re doing amazing things like Roku, there is a risk that one of the “Big Dogs” like Amazon, Google, Apple, Facebook, or other major tech companies may come in and still their market with an eye-opening product.
• International expansion: While this could be seen as both a risk and an opportunity, expanding internationally comes with its obstacles, including legal issues, market acceptance, more competition, etc.

My Opinion

You’re probably aware by now that I am very bullish on Roku, and I own long positions in the company’s stock. I see the rewards being far greater than any potential risks, not to mention I am a happy and loyal Roku customer. So for me, Roku is a strong buy for long-term investors.

To date, my positions in Roku have grown by more than 100% in value! So I’ll be holding onto these shares for years to come.