Roku’s Rapid Growth Compares Favorably With Netflix In Its Early Years

Roku (NASDAQ: ROKU) stock is up by about 4x over 2019, driven by its rapidly expanding software platform business, which sells advertising and streaming video content. Much like Netflix, Roku has benefited from the acceleration of cord-cutting and the pivot toward streaming services. However, the business models of the two companies are different: Roku acts as a platform that connects users with digital streaming content, while Netflix invests heavily in programming. In this analysis, we compare Roku’s growth with the early-stage growth of Netflix streaming platform, looking at key metrics including the number of subscribers, per-user revenues, and margins.

View our interactive dashboard analysis How Does Roku Compare With Netflix In Its Early Years?

• We use a 2015 to 2019E timeline for Roku, given that financial data is only available for this period. Moreover, the platform business really came to the fore during these years, before which Roku was viewed primarily as a hardware business.
• While Netflix launched its streaming service in 2007, the company offered the service as a bundle with its DVD business, only breaking it out into a separate business in 2011.
• For this analysis, we use DVD+Streaming subscribers data from 2008-2011 and Streaming-only figures (U.S. + International) from 2011 to 2015.

No. Of Subscribers: Roku Currently Has A Similar Number Of Subscribers As Netflix Did 5 Years Into Its Streaming Business

• Roku had about 27 million platform users at the end of 2018 and the number is projected to grow to over 35 million in 2019. In comparison, Netflix had about 33 million streaming subscribers at the end of 2012, 5 years post the launch of its streaming service.
• The growth rates of the two companies’ subscriber bases have been similar, although Netflix’s growth has been more volatile.
• As Roku largely caters to users in the U.S. and to an extent in Europe, it may have room to scale-up internationally, just like Netflix.

Netflix ARPUs Significantly Higher Than Roku’s

• Roku’s monthly ARPUs are well below Netflix, as it only acts as a go-between between content providers/advertisers and its users, unlike Netflix which actually provides content.
• However, it has been posting higher ARPU growth compared to Netflix in its early years of streaming, albeit on a much lower base.
• Note: Netflix ARPUs between 2009-2011 include DVD+ Streaming. ARPUs from 2012 onward are streaming only.

Roku’s Platform Revenue Growth Has Outpaced Netflix

• Roku has posted higher revenue growth, driven by its rising user base and growing ARPUs.
• Netflix growth has been slower, coming in at levels of 20-30% between 2009 and 2011 (when it offered DVD+Streaming bundles), while posting growth of between 30% to 40% post-2012.

Roku’s Margins Are Higher Than Netflix

• Roku’s Platform Gross Margins are significantly higher than Netflix Contribution margins since Roku operates largely on a commission basis and doesn’t invest meaningfully in content.
• However, Roku’s margins have been trending lower, driven partly by a higher mix of video-ads, while Netflix margins have been rising, likely due to better economies of scale.
• Contribution Profits are defined as revenues less Cost of Revenue and Marketing Expenses.

Roku’s P/S multiple, based on projected 2020 platform revenues, stands at 16x.

• In comparison, Netflix’s P/S in 2013 – when the company had largely pivoted to the streaming space – stood at about 6x.
• Roku’s higher multiple is likely due to its higher platform margins, better revenue growth rates, and the fact that it is an earlier stage company.
• Additionally, unlike Netflix, Roku doesn’t spend on content and it could have more platform stickiness given that customers have to invest in Roku hardware or a Roku-powered Smart TV – which they will likely hold for multiple years.

Conclusion

• Roku’s platform performance metrics compare quite favorably to Netflix’s metrics during the early stage of its streaming business.
• Moreover, like Netflix, Roku could have scope to scale-up its international operations, as its operations are largely focused on the United States at the moment.

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