Shares of Roku (NASDAQ:ROKU) have been up this month. On Friday, July 8, they jumped just over 5% when the stock closed at $98.11 for a $4.94 gain on the day.
Why the big move?
The streaming media company wasn’t making news on Friday. No new product releases, no earnings reports and no notable analyst upgrades in the headlines.
With Roku stock up over 240% year-to-date, chalk Friday’s pop up to a company that’s firing on all cylinders.
ROKU Dominates U.S. Streaming Market
Some of the biggest tech companies in the world are players in the video streaming market. Apple (NASDAQ:AAPL) had an early lead in the streaming TV market — the first Apple TV streamers were released in 2007 — but has since fallen behind. Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google has its Chromecast streamers and Amazon (NASDAQ:AMZN) has a series of popular FireTV devices. All three have their software in various smart TVs as well (Apple was the latest to join that club), and video game consoles including the PlayStation and Xbox are also popular streaming platforms.
However, none of these can come close to the popularity of ROKU in the U.S. market.
According to a report released in June by Strategy Analytics, ROKU not only continues to dominate the U.S. streaming market, it’s continuing to expand its lead. In its first quarter, there were 41 million Roku-based devices in use nationally, including Roku’s own streamers and smart TVs running Roku software. Over 30% of all devices sold in Q1 that are capable of streaming TV were Roku-powered.
ROKU earns revenue when its streaming hardware is sold. But the real prize is the ongoing revenue it collects through selling advertising on Roku channels, and taking a cut of subscription services like Netflix (NASDAQ:NFLX) when customers sign up using a Roku device. In fact, the company makes more money on advertising and licensing than through hardware sales. The success in leveraging its platform to grow that ad revenue has helped propel ROKU stock to over 200% growth this year, and an all-time record high several weeks ago.
Analysts have downgraded ROKU stock at several points this year, based on concerns that deep-pocketed competitors would expand their U.S. offerings. However, at this point nothing has been able to slow ROKU’s momentum in this country.
Could Anything Stop ROKU?
The Strategy Analytics report spikes out one key challenge that ROKU faces: international expansion. The current ROKU stock price is based largely on the company’s success in the U.S. market, but globally Roku is less of a player. The brand is not as well known and lacks the partnerships it enjoys with manufacturers making smart TVs for the U.S. market.
In 2018 one in four smart TVs sold in the U.S. ran ROKU software, but globally it was just 4%.
ROKU is going to have to work with TV manufacturers and spend money on marketing in order to build brand awareness outside of the U.S. market. Making the challenge even more difficult, competitors like Google, Amazon, Samsung and Apple are already well established globally — meaning ROKU will have to not only convince consumers to buy into its platform, in many cases it will have to convince them to switch from a competing platform. And that’s much more difficult.
International expansion will be expensive. It’s going to take time and there are no guarantees the company can muscle in. If the status quo remains outside of the U.S. market, then Roku stock is limited by how much revenue it can squeeze out of American customers — and the risk that one of the big players like Amazon decides to take a more serious run at disrupting the U.S. streaming market.
However, if you look at international expansion as an opportunity, then Roku stock price still has room to grow, even as it creeps back toward $100. With ROKU continuing to gain ground today, it appears that is the attitude investors are taking at the moment.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
