Roku(ROKU -0.69% ) has been producing set-top streaming appliances for householders’ living spaces for longer than practically any other competitor in the market.Thank you for reading this post, don't forget to subscribe!
Back in 2008, its small streaming box first made an appearance when subscription video on demand was still in its early days. Since then, it has emerged as a frontrunner in this sector. It presents set-top appliances and streaming sticks, and it collaborates with numerous TV manufacturers to market fully integrated intelligent televisions. The corporation has also just recently started providing its very own branded television range to consumers.
However, if you believe that Roku is earning profits from the sale of its streaming hardware, then you are disregarding the larger perspective of this business and why it represents one of the top methods for investing in streaming media.
Here is the actual concealed narrative behind Roku’s enterprise.
Roku actually doesn’t generate any revenue until you start utilizing its products.
Over the 12-month period concluding in September 2023, Roku purveyed streaming sticks, set-top players, branded intelligent TVs, and other devices worth $471 million. However, the expense of producing those devices amounted to $538 million. Yes, Roku is at a loss with the typical device sold, and this is before accounting for all the administrative, marketing, and research as well as development expenditures it accrues.
So, why would Roku willingly distribute its devices at a loss? The simple answer lies in the compensation received when purchasers genuinely commence using their devices.
When Roku submitted its IPO prospectus with the Securities and Exchange Commission (SEC) before its market introduction, it provided a comprehensive depiction of its business. In the section outlining its products, the foremost item on the list wasn’t its intelligent TVs or streaming players, it was advertising. Roku’s advertising enterprise, encompassing video advertising, audience growth for streaming services, and brand sponsorships, forms the foundation of its platform.
Furthermore, the platform yielded $2.9 billion in revenue for Roku in the same 12 months as it traded devices worth $471 million. Moreover, the platform division generated gross profit margins exceeding 50%, sufficiently outweighing the losses from streaming device sales.
Roku states that each of its 75.8 million users netted an average of $41.03 through its platform business over the past 12 months. This amount has actually declined from its peak in Q2 2022 when it produced $44.01 per user. This drop is attributed to a reduction in video advertising during an economically uncertain period and reduced spending on audience development by streaming services, amidst the pursuit of profits and conflicts involving actors and writers.
What positions Roku as one of the most advantageous investments in streaming
Roku has amassed a substantial user base by retailing its devices at notably low rates. As mentioned earlier, it currently boasts 75.8 million users globally.
More importantly, consumers not only procure its devices but also deploy them extensively. During the third quarter of the previous year, the typical user spent over 3 hours and 50 minutes daily streaming content on their Roku devices.
This grants Roku a potent standing. It manages the means of distribution for all leading streaming services. Any streaming service aspiring for ubiquitous availability needs to negotiate with Roku, and the company has evolved into an increasingly resilient negotiator as its audience has expanded.
Consequently, Roku can negotiate more favorable conditions for sharing profits and advertising with streaming services. Additionally, it can charge higher prices for video advertisements inserted in those streaming services.
Several other companies find themselves in a similar circumstance. Apple derives profits from a comparable platform-influenced enterprise, where companies remunerate to access its 2 billion iOS users. This has resulted in a remarkable $85 billion in service sales over the past year. Apple offers a model of how lucrative it can be to own a platform.
While Roku might not attain the same level of ubiquity as Apple devices, it is worth noting that it already generates nearly the same revenue per user from its platform business as Apple. This attests to the level of operational execution by Roku’s management. As the business continues expanding, securing bargaining power with advertisers and streaming services, and leveraging its operational expenses, it holds the potential to become immensely lucrative.
Following a substantial stock sell-off in 2021 and 2022, Roku observed a rebound in its shares in 2023, with a 125% upsurge. Nevertheless, the shares are still being traded at merely 3.6 times sales, indicating that the stock is undervalued. This presents an excellent opportunity to invest in the secular expansion of streaming without singling out a specific victor among rival media corporations.