On June 26, Wedbush raised its 12-month price target on Roku (NASDAQ:ROKU) from $65 to $105. The investment-research firm cited the company’s substantial growth opportunities. Roku stock is up significantly in 2019, so Roku shareholders surely welcome any upgrades to keep it moving higher.
And international expansion is where Wedbush finds justification for the upgrades. In its note to investors, the company stated:
“Roku has built an exceptional platform on the back of its players, and as it expands in the rapidly growing Smart TV category, it has positioned itself as best in class for OTT advertising and is poised for international expansion.”
I couldn’t agree more.
While its business in the U.S. is sizzling, the opportunities outside America are endless. Here’s why:
Roku Stock Has Barely Scratched the Surface
Consider Roku’s latest earnings report.
ROKU generated less than 10% of its $206.7 million in revenue outside the U.S. It’s so small that it doesn’t break out its international business, presenting its sales in two reportable segments: platform and player.
Of these two components, I’m going to focus on the platform business. That’s the one that the company monetizes through the use of advertising.
In January, eMarketer published 10 Ways Roku Is Growing Its Ad Business. It’s an examination of the many ways it can make money from ads. In 2020, eMarketer estimates Roku’s ad revenues will grow by 46% to $632.9 million.
If we assume that Roku generates 6% of its overall revenue from outside the U.S., the company’s international ad revenues in 2020 could amount to $38 million. That haul is hardly worth getting excited about.
However, if the company’s international business follows the growth path of its ad business in the U.S., the narrative changes. That’s because U.S. ad revenues will have grown by 1,010% through the end of 2020. At that point, investors must take the potential opportunity seriously.
Nobody thought Roku would get to $1 billion in annual revenue; yet, several analysts expect the consumer tech firm to hit this number by the end of fiscal 2019. That should do wonders for the Roku stock price over the long run.
Smart TVs Key to Growth
While advertising is the main ingredient in Roku’s pathway to GAAP profitability, smart TVs will also play a vital role.
Smart TVs are the tenth way eMarketer sees Roku growing its ad business.
“TV makers like TCL, Sharp and Hitachi use Roku’s software for their connected-TV products,” wrote eMarketer contributor Ross Benes on Jan. 16. “The value lies in user acquisitions; the deals are more about Roku gaining adoption and getting people into the habit of using its platform than about the money Roku makes from the partnerships, according to Rosenberg [Scott Rosenberg, Roku’s senior vice president and general manager of platform].”
Here’s the reality: Roku’s streaming players and devices are becoming less critical as the company continues to make inroads with smart TV manufacturers.
In 2018, approximately half of the smart TVs sold used an operating system like Roku’s. In the U.S., of all the smart TVs that had a proprietary operating system, Roku accounted for 20% market share. That’s second only to Samsung Electronics (OTCMKTS:SSNLF) at 33%.
Why Roku Is Undervalued
Roku’s operating system was built for TV, making it a much better experience. As it invests in international markets like Canada and elsewhere, manufacturers of TVs for sale outside the U.S. will gravitate to its operating system.
Internationally, Roku accounted for just 4% of the Smart TVs in 2018, leaving lots of fertile ground ahead.
As people outside the U.S. start using Roku’s operating system daily, the opportunities for advertisers will also grow. The more TV advertisers realize that streaming ads are the better way to go, the more revenues Roku will generate. And that directly plays into the Roku stock price.
In two years, the company’s international business won’t look anything like it does today. Before you pass on an expensive Roku stock price, might I suggest that you look to Netflix (NASDAQ:NFLX) for inspiration?
If the next two years go as I think they will, $200 might be underselling Roku stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.