Could Roku Become the Next Netflix?

The company started as a mail-order service for renting DVD movies, but its pivot into streaming content made it the top content provider it is today.

History can sometimes rhyme, but it doesn't always repeat itself. The company has built a reputation for its TV software.

It is in the early stages of changing from a neutral streaming platform to a source of original content. It's only one-tenth of the size of Netflix, but it could grow up to be much bigger.

Making a push for original programming.

Gaining and keeping the attention of your users is what media streaming is all about. Since moving into streaming, it's been an original content story for the company, slowly transitioning from licensing other people's content to replacing more and more of its catalog with its own productions.

The image is from the same source.

It was a neutral platform for streaming. Its operating software would be put on TVs to make them streaming-capable out of the box, and it would convert TVs into smart TVs. In its first quarter as a public company, the user base grew from 16.7 million active accounts to 56.4 million accounts.

At some point, it needs to be more than just a means for watching TV. It started investing in its own original programming with the launch of the Roku Channel. The early content was licensed, but now has original programming. The company signed a huge building lease in New York City to produce shows and movies after buying content from a failed streaming service.

The right time to attempt this was not yet. If it were to try this too soon, they would leave the platform and hurt the appeal of the platform. The time was right for the company to evolve as it has shown that it's become large enough to have leverage via its user base. "These streaming companies need me, so I'm not too worried about stepping on their toes."

Different approaches to generating revenue.

Maintaining engagement on the platform is what streaming is about. There are different ways in which to monetize those streaming eyeballs. The platform has always been free of ads.

The streaming service is becoming an advertising business. Instead of generating revenue from consumers, the company is tapping advertisers. According to a recent report, 45% of ads on connected TV went to Roku devices in the first half of 2021. According to the report, ad spending grew 50% year over year, which means that Roku is capturing a large chunk of this revenue pie that keeps getting bigger.

The company's average revenue per user (ARPU) grew 49% year over year to $40.10 in the third quarter of 2021. The growth of a company that charges the consumer must now be dependent on user growth, as they must now be aware of competing streaming platforms. I think that the ad-tech business of the company is a stronger model because it seems more consumer-friendly to give users a free product like the Roku Channel with targeted ads.

Is it a good time to buy?

The global supply chain issues, along with a marketwide sell-off of technology and growth stocks, have affected the user growth of Roku. It has given investors an attractive valuation on the stock.

The data by YCharts is for ROKU revenue.

The price-to-sales ratio has come down from a high of more than 30 to less than 10. The company is stronger today. The business is becoming free cash flow positive.

The analysts expect revenue to grow by more than 3% in the fiscal year that ends in 2022, which works out to nearly $3.8 billion. With the stock's valuation at these affordable levels, I think investors could reasonably expect it to appreciate at a similar rate to how the business grows, making it a compelling investment idea.