On September 21, the market saw a lot of red, with the three major indices — the Dow Jones, S&P 500 and Nasdaq — all falling sharply. But Roku (NASDAQ:ROKU) stock bucked that trend, instead rallying more than 15% on news that NBCUniversal’s Peacock streaming service was going to launch on the Roku platform.
Make no mistake. This is a big deal for Roku, since it underscores that the company is increasingly turning into the necessary and ubiquitous “cable box” of the streaming TV world.
So long as this remains true, Roku’s long-term growth narrative will remain robust, since being the “cable box” of this space positions the company to win the lion’s share of ad dollars that are set to migrate from pay TV (PTV) to connected TV (CTV) over the next several years.
To that end, ROKU stock is a long-term winner.
And I say stick with this winner, because the fundamentals remain solid and the valuation remains tangible.
Here’s a deeper look.
Roku’s Growth Flywheel
The Roku growth flywheel is pretty simple.
Roku is a marketplace which connects streaming services with consumers, and consumers with streaming services. As is true with any other marketplace, the core value prop of Roku to streaming services is to connect them with as many consumers possible, while the core value prop to consumers is to connect them to as many streaming services as possible.
With that in mind, here’s the growth flywheel which ensures dominance for Roku as the ubiquitous “cable box” of CTV for the foreseeable future.
- Create a big base of users.
- Leverage that base to attract streaming services looking for users.
- Use streaming service wins to attract more users looking for more streaming services.
- Lather. Rinse. Repeat. All the way to market dominance.
Breaking that down, Roku already is the biggest CTV software ecosystem on the planet. So, if you’re a media company and you are launching a new streaming service, you are going to have to launch that streaming service through Roku. Once you do that, Roku now has another streaming service in its library, which increases the attractiveness of the platform to users, so more users buy Roku sticks or TVs. That increases the size of the user base, so when the next media company launches a new streaming service, they are going to have launch that service through Roku.
Pretty simple, right?
The Peacock distribution deal underscores that this growth flywheel is alive and well today. Peacock tried to go at distributing its content alone. It didn’t work. Now, NBCUniversal is partnering up with Roku because the company needs Roku’s distribution. That will bring in a bunch of Peacock fans and viewers, thereby only increasing the size of the user base and the necessity of Roku has a distribution channel for streaming services.
So long as this growth flywheel continues to spin, ROKU stock will project as a long-term winner.
Huge Streaming TV Pivot
The aforementioned growth flywheel is so important to Roku because it puts the company at the epicenter of the enormous pivot in eyeballs and ad dollars from PTV to CTV.
We are all aware of this pivot because we are a part of it. Consumers everywhere are cutting the cord, ditching PTV and adopting CTV because streaming services’ offer better pricing, enhanced convenience and seamless access.
Traditionally, the number of PTV households in the U.S. has dwarfed the number of CTV households. But in mid-2018, those two numbers became equal for the first time ever. Now, the number of CTV households is greater than the number of PTV households, and the delta is only widening.
Of course, this has led to a surge in CTV ad spending, because ad dollars chase eyeballs. Still, only about 10% of U.S. TV ad spending happens through CTV channels, which makes no sense when you consider that U.S. consumers watch more CTV than PTV.
Over the next several years, this discrepancy between ad spending and consumption will narrow, as more and more ad dollars migrate from PTV to CTV. This is a multi-billion-dollar transition, and Roku is at the center of it all.
Big Upside for Roku Stock
When you look at the numbers, it’s clear that ROKU stock has big long-term upside potential.
The company will likely end 2020 with around 50 million active accounts and maybe $1.2 billion in Platform revenue. That compares to 1.7 billion global PTV households and $160 billion in global TV ad spending.
Thus, relative to its global opportunity, Roku is tapping into just 3% of its addressable user market, and less than 1% of its addressable advertising market.
Those numbers will grow exponentially over the next several years as more and more consumers and ad dollars rush into the CTV channel.
Where will they pan out?
I think ~10% market share in terms of both users and ad spending seems entirely reasonable for Roku. Assuming so, my numbers say that $21 or better in earnings per share is possible by 2030.
Based on a 20-times forward earnings multiple and an 8.5% discount rate, that implies a 2020 price target for ROKU stock of just over $200.
Thus, with shares trading below $200 today, I say stick with the rally.
Bottom Line on ROKU Stock
ROKU stock is a long-term winner, with increasing business momentum, and a still tangible valuation.
So long as those three things remain true, ROKU stock will keep powering higher.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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