Advertising Revenue Can Be Game Changer for Roku Stock

Advertisement

Roku (NASDAQ:ROKU) stock has been volatile with a flurry of news. The stock nosedived even after strong third-quarter results, but the recovery was equally sharp. The most recent news on its secondary stock offering has resulted in renewed downside.

Roku Stock Can Move Higher On Advertising Business Growth
Source: AhmadDanialZulhilmi / Shutterstock.com

Amidst this volatility, I believe that any downside is an opportunity to accumulate Roku stock. Business fundamentals remain strong with ample scope for sustained growth in average revenue per user.

While there are various growth triggers, I want to focus on the company’s advertising revenue potential. This discussion holds relevance with the recent acquisition of dataxu, which is intended towards strengthening the company’s advertising business.

Roku Stock and Programmatic Advertising

For Roku, programmatic advertising can be the game changer in the coming years and will ensure that ARPU continues to grow. To simplify things, an article from Harvard Business School explains the emerging concept of programmatic advertising:

Programmatic advertising creates value for marketers by allowing them to target advertisements for maximum impact. For example, a company advertising de-icing salt might focus their ads on users who live in areas experiencing cold weather.

The Harvard article also cites TechNavio, which estimates that programmatic advertising will grow at a CAGR of 21% from 2017 to 2022.

Another important trend is the shift towards connected TV (CTV), which is a television that connects to the internet. CTV is the medium for Over-the-Top (OTT) video content. With increasing adoption of CTV, the future of advertising is on connected TV.

While this was a broad overview on the market trend, the good news for Roku shareholders is the following: Nearly two-thirds (62%) of programmatic video OTT/CTV ads go to Roku devices. Amazon (NASDAQ:AMZN) is a distant second with 10% market share.

Clearly, Roku has a big advantage and the acquisition of dataxu will further cement the company’s leading position. Dataxu is a demand-side platform (DSP) that enables marketers to plan and buy video ad campaigns. The platform will therefore make it easier “for advertisers to buy ads on Roku’s connected TV platform.”

It is worth noting that in March, Roku announced a partnership with Adobe (NASDAQ:ADBE). This partnership, according to Multichannel News, “eliminates the problem of OTT viewers having to sit through the same ad over and over again.”

With these moves, Roku is well-positioned to remain a leader in the programmatic video OTT/CTV ads. As more advertising shifts from traditional TV to OTT, the company’s revenue will continue to grow.

Will Roku Enter Chinese Markets?

Another reason to be bullish on Roku stock is the company’s international expansion plans. Roku TV will be available in the United Kingdom towards the end of 2019. Roku’s TV launch partner in the UK will be Hisense.

It is worth noting that Hisense is a Chinese company with a leading market share of 17% in home markets. While Roku will provide more details on international expansion in early 2020, partnership with Hisense might provide inroads in China. This is a purely speculative opinion, but seems likely as Roku goes global.

However, there is no doubt that international expansion will trigger strong growth for Roku. Ralph Schackart, analyst for investment bank William Blair, believes that Roku’s growth can outpace Netflix’s (NASDAQ:NFLX) early international expansion phase. If this holds true, international expansion can be a big upside trigger for Roku stock.

Concluding Thoughts on ROKU Stock

The Roku stock price remains in an uptrend and I believe it will sustain with intermediate corrections. Advertising revenues will continue to grow and international expansion is another key growth catalyst.

Roku stock valuation might be on the expensive side, but there are reasons to believe that the company’s top-line growth will remain robust. In addition, as operating cash flows swell, the markets will remain excited about the stock.

Equity dilution has resulted in some correction, but it’s a good strategy to raise funds at current valuations. The dilution impact will be offset by earnings and cash flow growth. Overall, I maintain a bullish outlook on Roku stock.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/advertising-revenue-can-be-game-changer-for-roku-stock/.

©2024 InvestorPlace Media, LLC