If you're a regular viewer of streaming video, then you've almost certainly heard of Roku (ROKU -2.40%). Numbers from market research outfit Pixalate indicate that its share of North America's smart-TV and streaming-dongle market is a commanding 37%. That's more than twice the reach of its next-nearest competitor.
Of course, investors keeping tabs on Roku stock also know it's been a poor performer since 2021.
As could have been expected, shares soared during the COVID-19 pandemic when most everyone was stuck at home, watching a lot of television. This strength, however, wouldn't last. As the world eased its way back to pre-pandemic norms, Roku shares eased their way back to pre-pandemic prices. Thanks to a handful of stumbles following recent earnings reports, the stock's still down more than 80% from its 2021 high.
These post-earnings pullbacks might sour you on the idea of stepping in before the company reports its third-quarter results on Oct. 30. But this is a case in which the bigger risk is increasingly of missing out on a gain following a quarterly earnings release, and decreasingly of a post-earnings stumble.
The Roku you don't know is its growth engine
There's the Roku you know. That's the one that makes and markets streaming video technology.
Then there's the Roku you may not know ... the one in the advertising and promotion business, helping content creators monetize their movies, shows, and streaming services. The company also operates its own free-to-watch, ad-supported streaming channel called The Roku Channel.
This advertising arm is Roku's clear breadwinner. Its devices only account for about 15% of its top line, and they're also unprofitable. Advertising revenue makes up 85% of this company's revenue, boasting gross margins of more than 50%. Both businesses are growing, but it's the advertising and promotion venture that's obviously carrying all the weight. Streaming hardware is just a means to an end.
Data source: Roku. Chart by author. Numbers are in millions.
And that's the crux of the bullish argument for Roku. Its increasingly profitable platform business continues to grow, while other performance metrics improve as well.
There's every reason to believe the company will continue growing into the distant future too, for a handful of reasons.
Growth ahead
Getting straight to the point, Roku's advertising business has plenty of room to run as the television industry continues to evolve. This evolution is of course one that largely works against traditional cable television, and works in favor of a la carte streaming services such as Netflix and Walt Disney's (DIS 0.31%) Hulu.
Roku's top growth engine isn't just its position as a streaming middleman, though. The Roku Channel itself is disrupting some streaming stalwarts as well.
Although the company doesn't detail exactly where all of its so-called "platform" -- or advertising -- revenue comes from, a big chunk of it comes from its own streaming channel. Comscore suggests The Roku Channel is where the United States' FAST (free ad-supported streaming television) viewers consume 42% of their FAST content. That's even more than Paramount's similar FAST platform PlutoTV, and far more than Fox's Tubi, which makes up 20% of the nation's FAST consumption.
And this business is growing to be sure. KBV Research believes the global FAST market is set to grow at an average annual rate of 15% through 2030. In this same vein, market research outfit Omdia already acknowledges Roku is the market's biggest FAST platform, and further believes this will remain the case as it grows its connected TV advertising business worth around $3 billion per year now to $5 billion in 2029.
Data source: Roku Inc. Chart by author. ARPU = average revenue per user.
In the meantime, Roku is chipping away at non-FAST streaming rivals. Nielsen reports that U.S. consumers collectively spend more time watching The Roku Channel than they do watching premium-priced Warner Bros. Discovery's HBO Max. Roku's homegrown streaming channel is even on track to catch up to the aforementioned Hulu, with Disney+ not much further ahead of Hulu in terms of total viewing time within the U.S.
Then there's the overseas market, which has arguably been under-addressed by Roku -- until recently. Pixalate reports that Roku's hardware now makes up 50% of Latin America's streaming technology sales. Don't be surprised to see similar metrics in other parts of the world if the company decides to turn up the heat on penetrating new regional markets.
The bigger risk from here is doing nothing
Great, but does any of this tailwind make Roku stock a buy before the company posts its Q3 results near the end of this month? After all, this stock has not always done so well following these quarterly reports.
It is a buy before then, as long as you're committed to the company's business model -- and execution of it -- for the long haul. And that caveat is an important one to add. If you believe in the long-term potential of a stock, when you buy it doesn't matter all that much. It's the long-term hold that makes the difference.
Although Roku shares have admittedly stumbled in response to some of its recent quarterly reports, the news itself wasn't bad. It just wasn't everything investors were hoping to hear. If you take a closer look at the stock's performance over the past couple of years, however, you'll see that these post-earnings setbacks are short-lived, ultimately ceding to bigger-picture bullishness over its long-term potential.
In other words, the bulls are repeatedly testing the waters, waiting for the right backdrop. Given that Roku is making measurable forward progress regardless of the response to its quarterly earnings numbers, though, the market may finally start seeing and pricing in this progress following the upcoming earnings release.
But even if it doesn't, the longer-term bullish argument still holds water. Roku is standing right in the middle of where the television business is going. The stock's performance and price don't yet reflect this reality.
