Video streaming pioneer Roku (NASDAQ:ROKU) was flying high through 2020 and early 2021. Shares absolutely caught fire as video streaming got a massive pandemic boost. Between March 2020 and mid-February of this year, ROKU stock posted a gain of 514%. After peaking at an all-time high close of $469.70 on Feb. 16, ROKU shares went into a slump. The stock has rallied several times since but remains volatile and currently trades in the $431 range. One of the knocks that some investors have against Roku is its declining hardware business.
True, Roku got its start as a company that was focused on selling video streaming boxes. But I’m not particularly worried if hardware is becoming a side business.
Here’s why you shouldn’t be concerned about it either.
Roku’s Streaming Hardware Sales Continue to Slow
Roku actually got its start as a company that was spun off from the leading streaming video service back in 2007. Its business was selling set-top streamers, small boxes that would plug into a TV, connect to the internet and give owners access to streaming video services.
Roku proved to be very successful at this. By 2016 — even as every major tech company released its own video streaming hardware — Roku devices held a 49% share of the U.S. market for streaming hardware.
The current situation is dramatically different, and this is where some investors are becoming wary of ROKU stock.
One 2021 report put Roku in sixth place globally for sales of connected TV devices. (More on that report on a moment, but the findings aren’t the only concerning sign.) In its first-quarter results, Roku reported hardware (player) revenue of $107.7 million. That’s up just 69% from the same quarter in 2017. It would likely have been much lower except for the fact that gross hardware profit for the quarter was $14.8 million compared to $10.8 million for Q1 2017. Roku is moving hardware by selling it at far lower margins than in 2017.
In addition, Roku has expanded its hardware offerings, including soundbars that sell for $190 — more than double the price of its most expensive streamer and nearly five times the price of its cheapest.
Given the fact that Roku has its widest range of products ever, it’s supplemented streamers with (relatively) pricey soundbars, and margins are far lower than they were in 2017, it’s easy to see why 69% revenue growth in four years is worrisome. Especially since the streaming video market has exploded during that time.
Here’s the thing: forget about the hardware. At this point it represents just 19% of Roku’s revenue (compared to 64% in Q1 2017). More importantly, hardware now accounts for just 4.5% of the company’s profit.
Licensing the OS Is Where It’s At
Circling back to that report showing Roku devices at a measly sixth place share, there’s a catch to that number. It’s only counting Roku boxes. But seven years ago, the company began licensing its Roku operating system to smart TV manufacturers. Every one of these TVs in the home not only nets Roku a small licensing fee, it brings additional streaming marketshare for the company because those TVs act exactly like Roku boxes.
In fact, last year, 38% of smart TVs sold in the U.S. were running Roku software.
Growing Platform Revenue Is the Reason to Own Roku Stock
Roku hardware, plus all those Roku TVs means more users. More users means more eyeballs, which means advertisers are more anxious to pay to be on the Roku platform.
The effect was on full display in those Q1 numbers. Roku added 2.4 million more subscribers in the quarter (up 35% YoY), bringing its total to 53.6 million. Users streamed 18.3 billion hours of video, a 49% increase. Platform revenue grew 101% YoY. Average revenue per user (ARPU) was up 32%.
Bottom Line on Roku
Should you add ROKU stock to your portfolio? The stock earns a ‘B’ in Portfolio Grader, so it’s not a must-have. However, even after rallying from its 2021 lows I believe it still has upside. I also believe that a growing user base and growing ad revenue mean this stock is well positioned for long-term growth.
If you’ve been holding off on ROKU stock because of its weakening hardware business, hopefully I’ve made the case for why that shouldn’t deter you.
On the date of publication, Louis Navellier had a long position in ROKU. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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