Roku Stock: 0% Cable, 100% Streaming (NASDAQ:ROKU)

second in January, I wrote an article on Roku ( NASDAQ : ROKU ). Since then, the stock has collapsed by 50 % +. Roku ‘s stock is decidedly ‘broku ‘ to say the least. however, as you ‘ll find out by and by, the fundamentals of the business stay hard. With that said, here ‘s a deep prima donna on Roku. enjoy ! Roku Shares Slide 25 Percent After Q4 Revenue Drop

Justin Sullivan/Getty Images News

Investment Thesis

Roku is leading the cord-cutting revolution as television receiver streaming continues to take commercialize share from bequest cable television receiver. The switch towards 100 % stream, and 0 % cable seems inevitable. While Roku is leading the accusation, contest continues to put pressure on the empurpled giant. however, Roku has a unique value suggestion of being a service-agnostic and brand-neutral chopine, “ maniacally concenter ” on building the best television OS. Roku ‘s fundamentals remain potent and the caller has a long emergence track ahead. Furthermore, valuations are at the lowest multiples ever, offering investors a large margin of condom. As such, Roku is a strong Buy.

Value Proposition

Roku, a company that designed media players, was founded by Anthony Wood in 2002. Wood then joined Netflix ( NFLX ) in 2007 as the company ‘s newly Vice President, spearheading Netflix ‘s ambition to launch a streaming player of its own, the Netflix Player. This venture was acme mystery, and it was code-named Project Griffin. Inside Netflix's Project Griffin: The Forgotten History Of Roku Under

Source: Fast Company

Moments away before its launch, Netflix CEO Reed Hastings decided to pull the spark plug on Project Griffin due to doubts about entering the hardware space. At that time, Hastings believed that launching its own hardware would be viewed as competitive with early device makers — such as Sony, LG, and Samsung —which besides happened to be Netflix ‘s distribution partners. A few months later in 2008, Hastings decided to spin out Project Griffin to Roku, leaving Anthony Wood with a few Netflix employees and little cash in handwriting to finish what Netflix has started. In exchange, Netflix retained 15 % of Roku ‘s equity. A year former, Netflix sold all its Roku shares. The ship’s company booked a $ 1.7 million advance on a $ 6 million investment. If Netflix would have held on, its Roku venture would be worth billions nowadays. That brings us to the first topic of this article : what does Roku offer that makes it a multi-billion-dollar company today ? In a nutshell, Roku is the leading television streaming chopine for consumers, message providers, and advertisers.

Mission: To be the television receiver streaming platform that connects the entire television ecosystem around the earth .

Let ‘s take a look at Roku ‘s main offerings. Roku Streaming Devices Roku offers a kind of streaming devices that are powered by Roku ‘s proprietary engage organization. Consumers can purchase streaming dongles such as the Roku Express and Roku Streaming Stick, which can be easily connected to any monitor or television receiver with an HDMI input. Consumers can besides opt-in for the Roku Streambar, which is a soundbar with a streaming actor built into it. once connected, consumers can begin streaming content offered through Roku ‘s platform. To make streaming more accessible to the general population, Roku besides licenses the Roku OS to television receiver manufacturers and sells co-branded Roku TV models with built-in Roku OS. In fact, all Roku devices have Roku OS built into them. Roku OS on a tv

Source: Roku Website

At the effect of Roku ‘s deputation, the caller aims to make pour accessible, low-cost, and easy to use. At the same time, Roku ensures that a wide range of content is available to consumers, thus, driving utmost engagement. Media & Entertainment (M&E) On Roku ‘s platform, customers have access to thousands of channels that offer 500,000+ absolve and pay up movies and television receiver episodes. Users can besides watch survive television receiver, news, and sports, a good as current music and audio content. More importantly, Roku ‘s platform offers consumers frightful tractability, allowing them to add their favorite channels which can be found in the Roku Channel Store. This is in sharp contrast to bequest cable television providers which normally offer one-size-fits-all services with high, fixed monthly prices. With Roku, consumers can mix and match channels/content based on their preferences and pay for what they use, whether through purchases, rentals, or subscriptions — mine are Netflix, YouTube, and Spotify ( SPOT ). here ‘s an example of how much consumers can save if they completely replace their cable television providers with Roku : Roku savings

Source: Roku Website

furthermore, The Roku Channel, a impart develop and operated by Roku, provides consumers with 80,000+ ad-supported on-demand movies and television shows that Roku immediately licenses, 200+ bouncy linear television receiver channels, and master content through Roku Originals, all for free ! Within The Roku Channel, consumers can besides choose from 50+ premium subscriptions such as SHOWTIME, AMC+, and STARZ. Roku Advertising not only does Roku enables contentedness partners to quickly and easily publish streaming channels on its platform, but it besides enables advertisers to display relevant ads and reach highly-engaged audiences in a manner that bequest and cable television receiver providers are ineffective to fulfill. To provide an analogy, running ads on bequest cable television is like firing a shotgun whereas running ads on Roku ‘s platform is more similar to using a sniper. In other words, Roku ‘s platform allows for much more target ad campaigns. Roku offers three advertise solutions :

  • The Roku Channel — Free, ad-supported channel owned and operated by Roku.
  • OneView — Launched in 2020, OneView is an ad platform built for TV streaming, which allows marketers to manage their ad campaigns on Roku’s platform. Through OneView, advertisers can buy ad inventory from both Roku and content publishers. At the same time, advertisers can leverage Roku’s proprietary first-party data.
  • Brand Studio — Launched in 2021, Brand Studio produces new creative ad formats that go beyond the traditional 30-second TV ad spot, such as short-form TV programs, interactive video ads, and other branded content on The Roku Channel.

Roku OneView Product Guide

Source: Roku OneView Product Guide

To summarize, Roku is the leading television streaming platform. For consumers, Roku offers streaming devices powered with Roku OS, which consequently enables them to stream subject on Roku ‘s platform. For content publishers, Roku offers a platform to build and monetize big audiences. For advertisers, Roku offers marketing solutions to reach relevant, highly-engaged audiences, frankincense maximizing conversion rates.

Market Opportunity

As a result of the pandemic, people were forced to stay at home due to work-from-home and social-distancing policies. consequently, television streaming adoption accelerated as people find ways to entertain themselves. however, as economies reopen, ball-shaped stream consumption has stabilized over the last few quarters. For model, according to Conviva, ball-shaped see time only grew by 7 % YoY in Q4 2021. On the other hand, connected television receiver ( CTV ) viewing time dropped by 2 % in Q4 2021 ( Roku belongs in this category ). Despite the slowdown in CTV viewership, the shift from cable television receiver to television cyclosis is probable to continue. According to Insider Intelligence, US pay television receiver penetration will probably drop below 50 % by 2023 as the cord-cutting rotation continues. Pay TV penetration

Source: Insider Intelligence

At the like time, marketers are spending more on CTV platforms as cable television continues to lose viewership. As shown in the chart below, US CTV ad spending is expected to reach $ 29.5 billion by 2024, more than double from 2021 levels. US Connected TV Ad Spending

Source: Insider Intelligence

It is besides estimated that 73 % of the US population will probable turn to extraordinary ( OTT ) video streaming services for their media consumption by 2026. OTT service providers include YouTube, Netflix, Amazon Video ( AMZN ), Hulu, Disney+ ( DIS ), Apple TV ( AAPL ), and more. What do all these video streaming services have in common ? Roku. Ad-based video recording on demand, or AVOD, is besides expected to gain in popularity over the adjacent few years as people increasingly consume free ad-based video recording capacity. According to Insider Intelligence, AVOD viewers make up 50.9 % of digital video viewers in 2021 and are expected to grow to 61.2 % by 2025. This is a tailwind for The Roku Channel. In Roku ‘s Q1 earnings call, management besides mentioned that consumers spend 46 % of their television time stream, while advertisers spend alone 18 % of their television ad budgets on streaming. Management believes that both these figures will finally reach 100 %. Roku ‘s Q1 Shareholder Letter besides highlighted that television receiver streaming finally surpassed bequest give television in the US. According to Roku, 65 % of adults streamed television while 63 % watched bequest pay television receiver in March. The course is probably to continue where cable television finally becomes disused. Reach on TV Streaming surpasses legacy pay TV in the US

Source: Roku FY2022 Q1 Shareholder Letter

The cause why cable television television receiver is however prevailing today is because of the fact that numerous sports associations hush hold exclusive contracts with cable television television providers. once their contracts expire, we may see an accelerated fall of cable television receiver and accelerate borrowing of CTV streaming. here ‘s SVP Scott Rosenberg during the earnings margin call :

I mean, sports is surely a key driver for a number of the services on our platform in a key room that some of these services, whether it ‘s Paramount, Peacock, Football or with the Olympics. It ‘s an necessity instrument content type that these services are using to draw viewers into streaming. And in some ways, sports is the, the last pillar holding the traditional Pay TV bundle together. so, as we see that on that, we feel more sports become available through streaming services, we ‘ll see stay acceleration of consumers out of traditional Pay television and linear viewership into streaming. News has moved more promptly. We ‘ve got some bang-up news offerings in The Roku Channel. For exemplar, ABC News, NBC, Reuters, we have a short ton of offerings there. They do very well. And then there are standalone services american samoa well. I think newsworthiness has already moved and started to innovate and streaming. Sports is more of a mixed bag with obviously some content still locked up behind more traditional linear services.

In my public opinion, CTV will finally make up 100 % of global big sieve viewership, and Roku stands to benefit from this industrial shift.

Business Model

Roku has two main tax income segments : platform and Player. Platform Roku generates Platform Revenue from the sale of digital advertise services including :

  • OneView ad platform.
  • Content distribution services (subscription and transaction Revenue share, M&E promotional spending, Premium Subscriptions, and branded channel buttons on remote controls).
  • Licensing fees from service operators and TV brands.

Roku monetizes its platform through three primary ad business models :

  • TVOD (transactional video on demand) — As the name implies, Roku generates Revenue for each transaction executed on the Roku platform, including a la carte movie purchases, movie rentals, and pay-per-views. In this model, Roku retains 20% of the transaction value while the channel receives the remaining 80% of Net Revenue.
  • SVOD (subscription video on demand) — This is a revenue-sharing agreement between Roku and content producers that offer paid subscription services. Roku gets a cut of the subscription revenue, if and only if, the consumer signs up for the subscription on Roku’s platform. Similar to TVOD, Roku retains 20% of Net Revenue from subscriptions, perpetually. However, if the consumer signs up off-platform, Roku does not receive any Revenue.
  • AVOD (ad-based video on demand) — Some channels may offer free content to their viewers, and in most cases, free content is ad-supported. According to the Roku Distribution Agreement, ad-supported channels will default to an “Inventory Split”, whereby the channel sets up its own ad server and must allocate 30% of its ad inventory to Roku. Roku retains 100% of Revenue generated from its 30% ad inventory split. Channels may also opt-in for the Roku Sales Representation Program, where Roku manages and sells 100% of the ad inventory on behalf of the channel. In return, Roku receives a 15% service fee, as well as 40% of Net Revenue earned on paid ads.

Roku Inventory Split

Source: Roku Website

Player Roku generates Player Revenue from the sale of streaming devices and audio products. actor products are loss leaders such that they are typically sold at a loss as Roku intends to make streaming more available, accessible, and low-cost. This, in turn, grows Active Accounts, which results in increased Platform Revenue. As shown below, Player Revenue as a % of sum Revenue has been declining as Platform Revenue continues to gain grip alongside active voice Accounts. Roku revenue distribution

Source: Roku Investor Relations and Author’s Analysis

Growth

Growth has been full-bodied for the better part of 2020 and 2021 as the pandemic pulled forward years of growth. Since FY2021 Q2, growth has decelerated as the company faces baffling YoY comps and headwinds from the reopen of the economy. Despite a 79 % YoY growth in FY2021 Q1, Roku managed to grow Revenue by 28 % in FY2022 Q1, to $ 734 million, demonstrating the strength of Roku ‘s platform and the worldly shift towards CTV pour. Roku revenue

Source: Roku Investor Relations and Author’s Analysis

Breaking it down by segment, Platform Revenue grew 39 % YoY in Q1, to $ 647 million. much of the emergence in Platform Revenue over the final few quarters is due to higher tax income from advertise and capacity distribution services. The growing library of content and channels on the Roku Platform besides increased the ad opportunities available on the platform. Roku revenue segment

Source: Roku Investor Relations and Author’s Analysis

On the early hand, Player Revenue suffered YoY declines over the last three quarters. Player Revenue dropped 19 % YoY in Q1, to precisely $ 87 million. This is due to the lower volume of streaming devices sold and a decrease in their average sell prices. In Q1, for exemplar, Roku sold 12 % fewer pour devices and the modal deal price of devices decreased by 9 % YoY. The decrease in the average deal price of devices means that management is sacrificing Player profits for long-run Platform Revenue emergence. As such, we should see little to zero growth for the Player segment moving forward. Making streaming devices low-cost for the masses coincides with higher exploiter adoption. active Accounts reached 61.3 million in Q1, which is a 14 % YoY growth. The slowdown in emergence is chiefly ascribable to baffling YoY comps driven by government stimulation in FY2021 Q1. The television diligence is besides facing supply chain disruptions which led to an increase in television prices over the survive few quarters, resulting in lower television receiver sales and subsequently lower report activations. Roku Active Accounts

Source: Roku Investor Relations and Author’s Analysis

Streaming Hours were 20.9 billion hours in Q1, up 14 % YoY as more consumers join the platform. We may see Streaming Hours drop QoQ in Q2 or Q3 as people begin to spend less time at dwelling during the summer months. however, the opportunity to grow Streaming Hours on the chopine remains attractive as Streaming Hours per Active Account per sidereal day was 3.8 hours globally in Q1, versus 8 hours for US households. Higher Streaming Hours mean better advertise opportunities, and consequently, higher Platform Revenue. Roku Streaming Hours

Source: Roku Investor Relations and Author’s Analysis

Despite the slowdown in growth across all other metrics, Average Revenue Per User increase remains robust. ARPU grew 34 % YoY, to $ 42.91 in Q1. This shows strong advertise demand on CTV platforms angstrom well as gamey bargain power for Roku. More importantly, higher ARPU enables Roku to insulate consumers from rising material and ship costs in streaming devices, frankincense maximizing Active Account increase likely. Roku ARPU

Source: Roku Investor Relations and Author’s Analysis

All in all, growth numbers remain strong, peculiarly for the Platform segment and ARPU. I believe Roku will be able to sustain 20 % + emergence for the adjacent few years as consumers continue to cut cords and migrate to television pour.

Profitability

overall Gross net income was $ 1.4 billion in the last twelve months. In Q1, Gross Profit was $ 365 million, up a mere 12 % YoY. Q1 Gross Margin was 50 %, which was down from 57 % end class. Roku Gross Profit

Source: Roku Investor Relations and Author’s Analysis

If we look at each segment, Gross Margins have been trailing downwards for both segments. For the Platform segment, Gross Margin dropped from 67 % a year ago, to 59 % in Q1. here ‘s CFO Steven Louden on why Platform Gross Margin compressed.

Platform gross margin was 59 %, which was down roughly 8 points year-over-year, reflecting a shift towards a greater mix of video advertising compared to a year ago period, which had significant growth of higher gross profit M & E and contented distribution due to the launch of new services .

As for the Player section, Gross Margin dropped to negative territory. Q1 Gross Margin was ( 17 ) % chiefly due to rising costs associated with disruptions in the global supply chain, including higher mastermind fabricate costs and higher freight costs. Lower Player Revenue besides contributed to negative margins. In the approximate terminus, we should expect negative Player Gross Margins as global add chains remained constrained and management “ prioritize account acquisition and insulate consumers from higher costs ”. Roku Gross Margin By Segment

Source: Roku Investor Relations and Author’s Analysis

As shown below, we can see how the unlike components of operate on Expenses have trended. As a % of Revenue, we can see that management is ramping up investments in R & D and S & M in Q1, which grew by 400 and 500 basis points YoY, respectively. Clearly, management is prioritizing product invention ampere well as increasing brand awareness. Roku Operating Expenses

Source: Roku Investor Relations and Author’s Analysis

As a solution of lower Gross Margins and increased spend, Roku swing to a loss in terms of operating net income. Operating gross profit was ( 3 % ) in Q1, versus last year ‘s 13 %. As such, Roku has even to achieve meaningful operate leverage.

Roku Operating Profit

Source: Roku Investor Relations and Author’s Analysis

Adjusting for non-cash expenses, we arrive at an Adjusted EBITDA of $ 58 million in Q1, with an AEBITDA Margin of 8 %. The ash grey line is that Roku is profitable and not burning any more cash. Roku AEBITDA

Source: Roku Investor Relations and Author’s Analysis

net income Margins are similar to Operating Margins. here, we can see how net Income Per Share has fared over the last few quarters. Again, dropping to veto territories as the caller reinvests into growth. Roku Net Income Per Share

Source: Roku Investor Relations and Author’s Analysis

The quick choose is that Roku ‘s margin profile has been quite volatile and it has not shown economies of scale or operating leverage — surely a concerning sight for investors. This is due to supply chain constraints that distraught Player Gross Margin. furthermore, management is sacrificing short-run profitableness for long-run increase. however, the higher-margin Platform segment should continue to make up a greater part of total Revenue over time, which should be margin accretive to the business. As such, we should see margins improving, leading to stronger earnings potential for Roku.

Financial Health

Turning to the balance plane, Roku has $ 2.2 billion of Cash and Short-term Investments. full Debt stands at $ 576 million comprising $ 487 million of Operating Lease Liability and $ 89 million of borrowings from its Term Loan A Facility due February 2023. As such, Roku has a net Cash position of approximately $ 1.7 billion. The company besides has a healthy Current Ratio of about 4x. Roku Balance Sheet

Source: Roku Investor Relations and Author’s Analysis

Looking at the company ‘s Cash Flow, we can see that Roku is already Operating Cash Flow Positive, although only by a thinly margin in my opinion. In terms of Investing Cash Flow, the major spring includes $ 177 million to acquire Nielsen AVA and This Old House. In terms of finance Cash Flow, Roku has issued shares from time to meter, more recently in FY2021 Q1, where the company sold 2.6 million shares at a price of $ 379.26 — bang-up timing indeed — for gross proceeds of $ 1 billion. Roku Cash Flow

Source: Roku Investor Relations and Author’s Analysis

Roku ‘s free Cash Flow, although quite sporadic, seems to be improving. however, we may see FCF Margins compress as the caller ramps up Operating Expenses to reinvest into growth. Nonetheless, I believe Roku has a strong balance tabloid with a high net income Cash balance and convinced engage Cash Flow. Roku Free Cash Flow

Source: Roku Investor Relations and Author’s Analysis

Outlook

In terms of mentality, management expects the follow Q2 results :

  • Revenue — $805 million (up 25% YoY)
  • Gross Profit — $395 million (up 17% YoY, 49% Margin)
  • AEBITDA — Breakeven

management besides expects FY2022 Revenue to grow by 35 % YoY, which is about $ 3.7 billion. This means that we should see a reacceleration of emergence rates in the second half of FY2022. Full-year AEBITDA is besides expected to be $ 150 million, which is a steep shed from FY2021 AEBITDA of $ 465 million. CFO Steven Louden besides provided extra details on the company ‘s steering :

total net gross of $ 805 million reflects our expectations that the ongoing macro headwinds, I barely mentioned, have the electric potential to reduce or delay ad spend in certain verticals. however, we continue to improve our ability to monetize across our business, and we believe that this will be reflected in growing net gross despite a identical difficult comprehensive examination. Recall that Platform tax income in Q2 of 2021 more than doubled year-over-year. Gross profit of $ 395 million reflects our anticipation that in our platform business, we will continue to grow the portion of video advertising, which has slightly lower margins than other tax income streams. And we expect that supply chain disruptions will continue to pressure the Player business, resulting in a negative crying margin, as we prioritize the report acquisition and absorb elevated costs. together, we expect this will result in total gross margin of approximately 49 %. last, our lookout for Q2 adjusted EBITDA is breakeven, primarily due to our strategic commitment to invest in our business and the significant opportunity ahead of us. Recall that we curtailed spend during the early phases of COVID and then began ramping spend mid end year. And we, consequently, expect OpEx to increase approximately 90 % year-over-year. We besides continue to expect full year adjusted EBITDA of roughly $ 150 million.

Put just, investors should expect a reacceleration of growth in the back half of FY2022 after a very ruffianly YoY comps in Q2 ( Platform Revenue grew 117 % YoY in FY2021 Q2 ). Margins are besides expected to compress across the board, driven by ad mix, supply chain disruptions, and higher operational Expenses.

Competitive Moats

Based on my inquiry and analysis, I identified four competitive moats for Roku : brand, scale, network effects, and switching costs. Brand Roku is the # 1 television streaming chopine in the US, Mexico, and Canada by streaming hours. In terms of television units sold, Roku OS is the # 1 television receiver OS in the US, # 2 television receiver OS in Mexico, and # 1 accredited OS in Mexico. Some of Roku ‘s products were besides named the ‘Best 4K Streaming Media Device of 2022 ’ and one of the ‘ Best Soundbars Under $ 200 ‘, according to Consumer Reports. The Roku Streambars has besides been recognized as a best-in-class audio device by CNET, Yahoo, and Rolling Stone. As of this writing, Roku ‘s mobile app has a rating of 4.7/5.0 with 1.3 million+ reviews. It is besides rank # 7 in the Entertainment class. It is condom to say that Roku has one of, if not, the most powerful brands in the CTV outer space today. Scale Having pioneered television stream, Roku had a hard head start and has established itself as the undisputed king of television receiver stream. According to Conviva, Roku has a 31.8 % market share in Q4 2021. It managed to increase its commercialize share by 0.7 percentage points, despite rising rival. Furthermore, most of its viewership came from North America — arguably the most significant market — where Roku holds a 41 % grocery store share. In other regions, however, Roku has short to no market presence, providing a hanker growth runway for the caller. Roku Market Share

Source: Conviva

In my opinion, Roku is a service-agnostic and brand-neutral platform which may explain why consumers, contented publishers, advertisers, television receiver mark partners, and retailers favor Roku over its competitors. For model, television manufacturers are more dispose to use Roku OS than Samsung TV OS as Samsung is a conduct rival to them. Another example would be that companies like Walmart ( WMT ) would much prefer to run ad campaigns on Roku ‘s platform than on Amazon Fire television receiver since the latter ship’s company is a direct rival. Network Effects With a big and growing ecosystem of consumers, content publishers, and advertisers, Roku is well-positioned to enjoy herculean network effects. Its growing partnership with content publishers will expand its contentedness library, frankincense attracting more users to its platform. For model, in Q1, Roku reached an agreement with A+E Networks to expand its content on The Roku Channel. In addition, Roku partnered with Lionsgate to entirely stream upcoming blockbuster movies including John Wick, Expendables 4, and Borderlands. Roku besides launched discovery+ via Premium Subscriptions on The Roku Channel, which adds 70,000+ television receiver display episodes. There are excessively many to list hera, but the point is that Roku continues to land deals and partnerships with content publishers, which grows its capacity library, which in turn leads to a higher number of viewers on its platform. Roku has besides made it easier for brands to advertise on TVs. For example, Roku has partnered with Shopify ( SHOP ) to allow belittled businesses to launch television ad campaigns, something that has always been available lone to larger companies. In my Shopify deep dive, I mentioned the adopt :

In fact, Shopify ‘s scale is formidable. The caller has 2 million+ merchants across 175+ countries. This merchant basal includes 14,000+ Shopify Plus merchants such as Allbirds ( BIRD ), Heinz ( KHC ), FIGS ( FIGS ), Netflix ( NFLX ), Gymshark, NOBULL, and more .

This should amplify Roku ‘s network effect. last, Roku has a upstanding distribution strategy. First, it partners with major television receiver brands to license the Roku OS. Second, Roku sells its hardware through retailers such as Best Buy ( BBY ), Target ( TGT ), Walmart, and Amazon. Roku TV partners

Source: Roku Website

Switching Costs Although not ampere outstanding as the survive three moats, I believe Roku has a switching cost moat. hera is how it applies to the unlike stakeholders :

  • Consumers — people do not switch TVs easily as it is a high-ticket household item.
  • Advertisers — Advertisers turn to Roku due to its large scale (61.3 million Active Accounts), first-party data, and its integrated OneView ad platform. Their satisfaction is demonstrated by a 96% retention rate for advertisers that spent $1 million+ on Roku’s platform.
  • TV brands — TV manufacturers want to streamline their manufacturing process and branding. Therefore, they prefer to work with just one (or at most, two) TV OS providers. Choosing Roku’s industry-leading OS is a no-brainer.

Valuation

Since its all-time highs in July 2021, Roku has lost 80 % of its rate. The selloff on some high-quality growth stocks, including Roku, seems to suggest that these companies are heading towards bankruptcy. I beg to differ. barely like many companies, Roku is facing ruffianly macro headwinds such as supply range disruptions, high inflation, and rising pastime rates. however, the fundamentals of the business remain strong and the growth narrative of the company remains intact. I believe the selloff is undue. On a historic basis, Roku has never traded this cheap before, trading at a 2.8x EV / NTM Sales multiple. It is valued even lower than its March 2020 lows. Roku valuation

Source: Koyfin

We can see the same form on an EV / Gross Profit footing, trading at only 7.6x. Roku valuation

Source: Koyfin

We can besides see that institutions have been buying Roku over the end few months. Roku institutional ownership

Source: Fintel

I understand that increase is slowing down and that profitableness metrics look watery in the short-to-medium term. however, I think the selloff to the downside is overdone, which is good, as it provides a large margin of condom for long-run investors.

Catalysts

Live Sports As mentioned by management, live sports is the final smash in the coffin for cable television receiver. The cord-cutting course will accelerate if cable television receiver providers lose their rights to broadcast live sports. When that happens streaming players like Roku will benefit vastly. The Roku Channel The Roku Channel could, possibly, be one of the major gross drivers for Roku. As mentioned earlier, Roku enters into an “ inventory Split ” with ad-supported channels, receiving 30 % of the ad inventory. however, since The Roku Channel is developed and operated by Roku, there ‘s no need for an “ inventory Split ”. As such, Roku controls 100 % of the ad inventory and consequently, retains 100 % of ad gross generated from The Roku Channel. As The Roku Channel expands its subject library, more consumers, content producers, and advertisers will flock to The Roku Channel, driving high-margin gross for the business. International Expansion Roku ‘s external scope is silent minuscule, with Revenue in external markets making up less than 10 % of Revenue. Roku has recently introduced cyclosis players in Germany and launched advertise in Mexico. however, International ARPU is still very low, which should present increase opportunities for Roku. here ‘s CEO Anthony Wood on international monetization :

And if you think about ad growth broadly from Roku ‘s commercial enterprise point of view, there ‘s a shift of traditional television receiver ad dollars to streaming in the United States. In the remainder of the markets around the global, Roku is much more focus at this point in the life bicycle on building active accounts. And we scantily started monetization. We good recently, in Mexico, launched ad sales, but almost no ad monetization in the rest of the world. That ‘s besides going to be–I mean the solid earth is going to switch to streaming and all television receiver advertise switch to stream .

Partnerships & Innovation The launch of The Roku Channel, the OneView platform, and the Shopify partnership are probably the most crucial developments made by the caller so far. however, I expect Roku to continue its cut read of invention and strategic partnerships, driving tax income in the process. Roku timeline

Source: Roku FY2022 Q1 Shareholder Letter

Risks

Concentration Risks According to Roku, a handful of content publishers make up a significant parcel of entire stream hours. For model, in FY2021, the clear three streaming services represented 50 % + of total stream hours. In addition, Amazon, Best Buy, and Walmart make up 69 % of Player Revenue for both FY2020 and FY2021. Supply Chain Constraints again, the ongoing issue chain constraints will probable put coerce on ad spend and profitableness metrics for the foreseeable future. Furthermore, Active Account growth may turn out delicate as promote television prices discourage people from buying new TVs. SVOD Saturation As you may have already known, the king of SVOD, Netflix, reported blue Q1 results. In particular, ball-shaped Streaming Paid Memberships dropped QoQ for the first time in a decade, to 221.6 million subscribers. furthermore, the ship’s company expects further drops in Q2 to 219.6 million subscribers. This could be a symptom of a larger problem as the SVOD diligence matures. however, do note that Roku is service-agnostic. hera ‘s CEO Anthony Wood explaining further :

If you look at Roku as a platform, there ‘s lots of different services that consumers can select to stream from. Streaming has never been more democratic. The viewers have equitable a enormous total of options. And so–and that ‘s causing overall engagement across our platform to grow. Any particular military service might be going up or down or whatever has some specific dynamics, but in aggregate, we’re seeing streaming grow.

management besides mentioned that the AVOD slope of its business is growing quickly, so it should offset the refuse in SVOD Revenue. however, we can not wholly ignore Netflix ‘s decay as it is one of Roku ‘s major partners. Competition Despite holding a 30 % + market parcel in the big screen class, Roku silent faces baffling competition from the likes of Amazon, Samsung, Google ( GOOG ), Apple, and more. Some television manufacturers have besides created their own OS, and serve operators like Comcast ( CMCSA ) besides offer television receiver streaming solutions as part of their cable television receiver plans. Conviva besides found that peers like Samsung, LG, and Android television receiver are growing much faster than Roku. Growth in viewing time for top big screens

Source: Conviva

Despite competitive pressures, I believe Roku has a strong competitive advantage of being a service-agnostic and brand-neutral platform. Furthermore, CEO Anthony Wood believes that being “ maniacally focused “ on building the only purpose-built television OS is going to set the caller apart from competitors :

sol, we ‘ve been competing identical effectively. We take rival very badly. I do n’t see any particular dramatic change in the competitive landscape, with all the stuff that ‘s going on. It ‘s just more of the same, and we will continue to compete in marketplace share. I think we ‘ll continue to grow although there ‘ll be puts and takes as we move along that path. We continue to innovate. We’ve built the world’s only purpose-built operating system for TV, it ‘s one of the basal reasons we ‘re so successful. Our competitors all take – by and large take mobile operating systems and port them to TV, and that is versus Roku ‘s approach is from the ground up, build the best possible operating system just for TV and keep introduce and being maniacally focused on that .

Conclusion

In compendious, Roku is the leading television receiver streaming platform that connects the stallion television receiver ecosystem around the earth. The cord-cutting tendency is well afoot and over time, 100 % of television will be streamed, with cable television receiver all in in the water. Roku will benefit from this industrial switch.

however, Roku is not alone in the CTV space ; technical school giants are besides piling resources to capture this laic swerve. Despite competitive pressures, Roku is the lone purpose-built television OS that is service-agnostic and brand-neutral. This should set Roku apart from its peers. While the stock looks ‘broku ‘, business fundamentals remain firm. however, margins may look weak in the future few quarters or even years as management reinvests into the clientele. Nonetheless, the 80 % selloff seems exaggerated — I believe it is a great time to accumulate shares of Roku at these levels. Thank you for reading my Roku deep honkytonk. If you enjoyed the article, please let me know in the comment section gloomy below .

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