What’s Behind Roku’s $470 Million Revenue Addition In 2020?

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Roku’s (NASDAQ: ROKU) Ads and Commission segment revenue has grown 3.3x from $225 million in 2017 to $742 million in 2019, reflecting a whopping growth of 229%. During the same period Roku’s total revenues increased by 120% from $513 million to $1.1 billion. We expect the company to add close to $470 million in additional revenue in 2020, of which 97.5% is likely to be contributed by Ads & Commission, as we detail in our interactive dashboard Roku Revenues: How Does ROKU Make Money?

The massive 229% surge in segment revenue between 2017-2019 was led by growth in subscriber base as well as average revenue per user (ARPU), as demand for streaming services has increased significantly over the last few years. Though the outbreak of coronavirus in early 2020 has led to a gloomy near-term outlook for most industries, the current pandemic could prove to be a boon for Roku. The global spread of coronavirus has led to lock down in various cities across the globe, which has affected industrial and economic activity. The shutdowns in major cities across the globe has led to home confinement of people, which in turn has led to higher demand for streaming services and home entertainment options. This is expected to lead to further growth in subscriber base and revenue from the Ads and Commission segment. Healthy growth in the Ads & Commission division is the primary factor behind Roku’s stock rallying 389% from $27 (when it listed in 2017) to $132 as of 11th May 2020. We discuss Roku’s valuation analysis in full, separately.

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Company Overview

Helping users avoid logging in to different streaming platforms to view different content, Roku allows you to watch paid and free content from the internet such as Netflix, Amazon, Hulu, YouTube, etc. The only thing Roku streaming devices and TV needs is an internet connection to get going. Competition is from large technology and consumer electronics companies including Amazon, Google, and Apple. These large competitors have helped to increase consumer awareness of TV streaming and have contributed to the growth and evolution of the overall streaming media marketplace. However, their resources and brand recognition pose significant competitive challenges.

Roku reported $1.1 billion in total revenue in 2019. This includes 2 operating segments-

  • Ads & Commission: $741 million (66% of total revenue in 2019). Generates revenue from advertising sales, subscription and transaction revenue share, sales of branded channel buttons on remote controls, and licensing arrangements with TV brands and service operators.
  • Devices & Accessories: $388 million (34% of total revenue in 2019). Generates revenue from the sale of streaming players through consumer retail distribution channels, including major brick and mortar retailers, such as Best Buy and Walmart, and online retailers, primarily Amazon.

Growth In Ads & Commission Revenue

  • Trefis projects the division to add close to $456 million to its revenue base in 2020, reflecting y-o-y growth of 62%.
  • Higher revenue is expected to be driven by healthy growth in active user accounts and a rise in ARPU.
  • Average active user accounts increased from 16.4 million in 2017 to 32 million in 2019. It is set to grow further to about 45 million by 2020.
  • Sharp growth in the user base is likely to be driven by new player launches and smart TV operating system (OS) integrations, that include new Roku streaming players launched in September 2019, new smart soundbars at Best Buy and Walmart, and new Roku smart TVs from OEM partners like TCL, the effect of which is expected to be further augmented by higher streaming demand due to the ongoing lockdown.
  • Healthy growth in advertising revenue has led to steady growth in ARPU, which increased from $13.80 in 2017 to $23.10 in 2019 and is expected to go to $26.60 in 2020.
  • This trend is expected to continue in the near term as advertising revenue is projected to grow further following the acquisition of dataxu, Inc., a demand-side platform (DSP) company that enables marketers to plan and buy video advertising campaigns.

The Devices & Accessories segment saw its revenue grow from $287 million in 2017 to $388 million in 2019. Our interactive dashboard on Roku Revenues provides 2020 and 2021 outlook for the Devices & Accessories segment.

Overall Roku’s business is expected to benefit from the current crisis, with the primary growth driver being the Ads & Commission division, which is projected to contribute 97.5% of Roku’s incremental revenue of $470 million in 2020.

Though Roku’s stock crashed from $137 at the beginning of 2020 to $64 in mid-March due to panic selling in the market, it has recovered since to $132 as of 11th May 2020. As per Roku Valuation, Trefis has a price estimate of $130 per share for Roku’s stock.

Similarly, here’s how streaming giant Netflix is expected to add over $4 billion in revenues in 2020.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

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