Ark Invest CEO Cathie Wood has long been bullish on Tesla (TSLA -1.92%), and that certainly hasn't changed. The electric car maker still accounts for more than 8.2% of Ark's flagship investment product, the Ark Innovation ETF (ARKK -2.12%). But it has slipped to second place in the portfolio, and Roku (ROKU -3.05%) now occupies the top spot, accounting for 8.4% of the ETF.
Of course, it doesn't really matter whether Roku ranks first or second. Wood clearly has conviction in the company. Does that make the stock a buy?
Image source: Getty Images.
The gateway to streaming entertainment
The Roku brand has become synonymous with streaming entertainment. While the company is best known for its presence in smart TV operating systems and its streaming players, its platform segment is the heart of its business. Roku connects viewers with virtually every ad-supported and premium streaming service, making it possible to purchase and manage a world of content on a single platform.
The company monetizes its platform through digital payments (Roku Pay) and digital advertising. Specifically, the company provides billing services to content publishers, and its adtech platform (Roku OneView) helps marketers plan, measure, and optimize data-driven campaigns across connected TV, desktops, and mobile devices. Notably, Roku boasts more active users than any rival streaming platform, meaning it has more viewer data. That gives the company an edge.
The benefits of leadership
Last year, Roku ranked as the leading streaming platform in the United States, Canada, and Mexico as measured by streaming hours. Better yet, it powered 32% of all streaming time worldwide, capturing nearly twice as much market share as its next closest competitor, Amazon Fire TV. Management believes Roku OS is the foundation of that success. As the only operating system purpose-built for TV, Roku's platform theoretically provides a better user experience than modified mobile operating systems like Amazon Fire OS.
Roku is working to reinforce that edge by adding active accounts and driving viewer engagement. Last year, the company debuted its streaming players in Germany, and it launched new Roku TV models in the U.K., Mexico, and Brazil. More recently, the company added personalized recommendations and shoppable ads to its platform.
Roku is also investing aggressively in The Roku Channel, its own ad-supported streaming service. It features hundreds of live linear TV channels and thousands of free movies and TV shows, including dozens of original titles. To further differentiate its platform, Roku is slowly building a portfolio of original content. Over 50 Roku Originals have aired already, and more are slated for release this year.
So far, the viewer response has been overwhelmingly positive. Last year, The Roku Channel ranked among the top five channels on the platform, and Roku Originals accounted for half of the top 10 titles. That trend held through the first quarter of 2022.
Collectively, Roku's growth initiatives have fueled a solid financial performance over the last two years.
|
Metric |
Q1 2020 |
Q1 2022 |
CAGR |
|---|---|---|---|
|
Revenue (TTM) |
$1.2 billion |
$2.9 billion |
53% |
|
Free cash flow (TTM) |
($55 million) |
$183 million |
N/A |
Data source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.
As a caveat, Roku saw a deceleration in several important metrics in the first quarter. Active accounts and streaming hours rose just 14% as high inflation, the end of government stimulus payments, and the lifting of pandemic lockdowns impacted consumer behavior. However, Roku's engagement still beat the broader streaming industry, which saw viewing time rise just 10% in the first quarter.
Is Roku a buy?
Advertisers will spend $19 billion on U.S. connected-TV ads this year, according to eMarketer. But BMO Capital Markets believes that figure could reach $100 billion by 2030. The impetus behind that trend is simple: Programmatic ads on connected TV can be targeted based on viewer tastes and preferences, but traditional ads on linear TV cannot. That puts Roku in front of a big market opportunity.
Competition with rivals like Amazon, Alphabet, and Apple will likely intensify. But the Roku brand already carries weight with consumers, and Roku is the most popular streaming platform by a wide margin. If the company can achieve a similar level of success with The Roku Channel, it would truly differentiate its business, leading to supercharged growth.
With that in mind, both Cathie Wood and I think it's worth owning this stock. And with shares trading at 4.5 times sales -- near their cheapest valuation in the past three years -- now looks like a good time to buy.
