- Ads & Commissions constitute 95% of the Trefis price estimate for Roku's stock.
WHAT HAS CHANGED?
- Impact of coronavirus outbreak
Roku stock declined over the month of March as the Coronavirus crisis prompted a huge sell-off in the U.S. markets. While Roku is viewed as a stay-at-home stock, that should benefit from the crisis, as its viewers stay home and stream an increasing amount of online content, it was expected that the advertising business - which has been the biggest driver of Roku's growth - could slow down as the economy enters a downturn. But following the stimulus announcement by the Fed and with Roku's advertising business not taking a hit, the stock price has recovered 4.5x from its March lows of $64 to its current level of around $300 as on 29th March 2021.
- Latest Results (FY2020)
Roku released its FY 2020 results in February 2021. Revenues came in at $1.8 billion during the year, about 57.5% more than the year-ago period. This was mainly because of 71% growth in platform revenues. Roku added close to 15 million incremental active accounts in 2020 to reach 51.2 million. Additionally, streaming hours increased by 20.9 billion hours over last year to 58.7 billion. Average Revenue Per User (ARPU) increased $5.62 YoY to $28.76. Roku reported a loss per share of $0.14 in 2020 as against a loss of $0.52/share in 2019.
- Growing Hardware Business
Roku introduced a range of new devices, including new audio hardware. The company uses these devices as a way to grow its market share, and then monetize its audience via advertising.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
- Active accounts: We expect Roku's active accounts to grow from around 51 million in 2020 to about 145 million by 2027, driven by a higher installed base of Roku streaming devices and greater adoption of the Roku OS by TV manufacturers. However, if the metric grows at a slower pace, rising to just about 100 million users by the end of our review period, there could be a downside of about 30% to our price estimate. On the other hand, if the metric exceeds our expectations and grows to about 180 million users, there could be an upside of about 20% to our price estimate.
- Annual ARPU: We expect ARPU for the platform business to grow from around $29 in 2020 to around $64 in 2027, driven by higher advertising loads and the availability of more premium content, for which Roku takes a commission on sales. However, if ARPUs only expand to about $50 by 2025, there could be a downside of over 20% to our stock price. On the other hand, if ARPUs grow to around $80 in the same time period, there could be an upside of about 18% to our price estimate.
Roku sells digital media players that enable users to access Internet-streamed video via their television sets. The company also licenses its operating system, called Roku OS, and its smart TV hardware reference design to TV manufacturers. While the company is best known for its hardware, it has been scaling-up its software platform as it looks to become a leading player in the distribution of streaming video, which is increasingly supplanting linear pay TV.
SOURCES OF VALUE
We believe the Ads & Commissions segment (Platform) is more valuable than the Devices segment for three primary reasons:
1) Its higher revenue base (about $1,268 million in 2020, versus about $510 million for Devices)
2) Stronger gross margins of 60% in 2020 versus Devices segment margins of about 8.5%.
3) Higher projected revenue growth rates. We expect revenues to grow at over 30% CAGR over our forecast period, versus growth rates of less than 10% for Devices.
Cord cutting is gathering pace
Customers have been increasingly canceling their pay-TV subscriptions in favor of Internet-based streaming options. Over 2018, the major U.S. pay-TV players lost about 3 million subscribers combined, per the Leichtman research group, compared to losses of less than 1 million subscribers in 2016.
The linear TV market in the U.S. is valuable, with advertising spends on TV estimated at about $71 billion in 2018 per eMarketer, with user spending on pay-TV subscriptions standing at over $80 per month. Roku, which is trying to become a distribution platform for streaming content, could stand to benefit as users and advertisers move their spending away from linear TV to the connected TV.
Increasing engagement on the Roku platform
Roku's active users are becoming more engaged with its platform. For instance, over 2019, the total number of hours streamed on the company's platform rose by 68%, while its subscriber base expanded by about 36%. The higher engagement should translate into higher revenues for the platform business, both in terms of advertising as well as commissions on content purchases.
Higher uptake of Roku OS software by Smart TV players
Roku's software platform is seeing a stronger uptake by TV OEMs, who leverage the company's operating system and reference design to produce connected TVs. As TV sets have long replacement cycles (7 to 10 years, according to IHS Markit), this could give Roku a loyal base of users to grow its platform business.