Roku (NASDAQ:ROKU) has defied the bears who claimed that its product and service would lose relevance as the streaming space got more crowded. Just a few months ago, several equity research analysts downgraded ROKU stock, overwhelmingly citing full valuation.
Instead, ROKU stock has shown market leadership. It set a new 52-week high last week. While the stock is currently in digestion mode, the momentum since the beginning of the year continues to go in one direction: up.
While FAANG stocks still grab a disproportionate amount of headlines — not all overwhelmingly positive, I might add — ROKU’s performance year-to-date of 251% outshadows all FAANG members. High-flying Facebook (NASDAQ:FB), for example, with its crypto ambitions, has seen its stock rise a fraction of ROKU’s, up over 50% over the same time frame.
News of Roku’s intent to go international may have helped propel the stock to new highs, but there is real growth potential in successfully tapping new markets. Successful execution, or at least more concrete indications of the actual potential of its foray into international territory, could give the stock fresh fuel to continue setting new highs in the second half of the year.
ROKU Stock Goes Global
Technically, Roku already has a presence in the United Kingdom, France, Ireland, Mexico and a handful of Latin American countries, but the arrangement is typically a licensing-modeled one based on Roku’s smart TV operating system.
At only 10% of Roku’s total revenue, based on last year’s fillings, there is no doubt that ROKU has plenty of room to diversify its revenue geographically. In recent months, Roku has made key hires to prepare to accelerate international growth both in Latin America and Europe.
Brazil is one of the specific countries Roku is eyeing. A spokesperson did not give details as to a launch date but stated, “As a global company we are constantly assessing different countries that could offer new opportunities to fuel our growth. We see great potential in the streaming market in Brazil.”
As home to the largest economy in South America (based on GDP), Brazil is not only an attractive market in terms of size, which would help Roku expand its customer base, but also its rapidly growing television streaming habit.
Learning From NFLX in Brazil
Without much fanfare, Brazil has become the largest non-native English speaking market for Netflix (NASDAQ:NFLX). Netflix entered the Brazilian market in 2011 and added 1.5 million subscribers last year. While Netflix does not break out its international subscriber based by country, a third-party consulting firm estimated total Brazilian subscribers at 8.5 million.
The growth is there to support Roku’s expansion as well. Beyond this year, the streaming market is expected to grow by 20% year-over-year, reaching just shy of $1 billion in 2022. This exciting growth picture wasn’t always the one being painted though.
When Netflix first entered the market, they stumbled a bit. There were payment issues and adjustments were needed to tailor to local viewing habits.
Roku is able to learn from those stumbling places where appropriate, but as an aggregator as opposed to a content creator, there is less risk for them. So, there is good reason for ROKU stock to be setting its eyes on Brazil as one of its starting places to bring an easily navigable OTT service to a global audience.
The Bottom Line on ROKU
Valuations looked lofty a few months ago and have only gotten more stretched. That said, with ROKU’s foot on the gas pedal to expand internationally into a few targeted high-potential countries, the valuation can be justified.
Monetization is a priority for ROKU. Management understands that scale and a large, diverse customer base are key elements to improving advertising revenues. In an ever-crowded domestic media market, Roku is smart to look beyond the U.S. to diversify those income channels.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
