Will Roku Stock Rocket Higher?

Roku Stock Forecast: The mass exodus from cable to streaming services isn’t limited to the United States. In 2018, streaming topped cable worldwide for the very first time.

As a whole, consumer spending on home entertainment hit $55.7 billion that year, marking a 16 percent increase over 2017. Digital home entertainment was the driving force behind this growth, with a year over year increase of 24 percent in the United States, and an increase of 34 percent worldwide.

The fastest growing area of home entertainment is online video service subscriptions, which went up 27 percent in 2018 for a total of 613.3 million. This is notable because it marks a lead over traditional cable, which recorded 556 million subscriptions.

Cable Revenue Is Headed Lower

Cable may still be pulling in more revenue – $118 billion in 2018 – but it is clear that cable revenue has no place to go but down. More than 70 percent of Americans are using home subscription services today, and as streaming service content offerings grow, there is every reason to believe they will cut the cable cord for good.

Obviously, there is an important opportunity for investors in the rapidly growing digital media market, but finding the right point of entry is a challenge. While industry leaders like Netflix, Hulu, and Amazon Prime seem well-positioned for future success, it is unclear whether they have room for dramatic future growth.

In the meantime, new digital streaming services are popping up regularly, each with its own unique value proposition. For example, the industry-wide impact of the November 2019 debut of Disney+ is top of mind for many industry analysts.

Many investors have decided that predicting the next big streaming service is a losing proposition. Instead, they are focused on the platforms that make home streaming of digital content possible. Here, Roku is the clear industry leader. But is Roku a buy?

Does Roku Make Cable Obsolete?

Roku isn’t a streaming service like Netflix and Hulu, and it doesn’t have its own selection of original content. It’s actually more important to the home video streaming experience.

Roku devices make it possible to enjoy the same digital streaming experience on a television as on a mobile device. Before Roku, consumers had to rely on their internet-connected hardware to watch YouTube, Amazon Prime, and other programming. The addition of Roku brought those same services to the big (home) screen, which has made cable all but obsolete.

There are Roku-enabled televisions on the market that users can simply set up and start streaming. However, it is not necessary to buy a new home theater system to get streaming access. Roku also has a selection of streaming players that are compatible with most standard television sets.

With Roku, users have access to just about every streaming platform in existence, provided they have a subscription. As Roku says, “The choice of what to watch and what to pay are up to you. We like to call it tv on your terms.”

Roku Business Model Sidesteps Content Creation

Roku’s decision to focus on facilitating the use of streaming services versus creating its own streaming channel is an important one.

Industry giants like Netflix and Hulu spend massive amounts on producing original content to keep viewers’ attention.

Roku isn’t competing in this space, so there is no need to incur huge production expenses. Instead, Roku is partnering with leading streaming services to bring those services into consumers’ homes.

The most recent example of such partnerships is the announcement that Apple has selected the Roku platform for its Apple TV.

Certainly, there is competition for streaming hardware. Apple and Amazon have their own internet-connected boxes and gaming consoles.

However, Roku has already achieved deep market penetration, and it is far and away the number one choice for new users. That means plenty of opportunities to grow complementary revenue streams, and a variety of publishers and marketers consider Roku a critical component of any comprehensive marketing strategy.

All of that sounds good, but investors want to know what that means for Roku stock forecast. Has Roku already hit its peak, or is there still room for growth and profit?

Roku Market Penetration Is Astonishing 

It’s no exaggeration to say that Roku is number one. In the US, more than 41 million Roku devices and Roku-enabled televisions are in use.

Roku commands 39 percent of the total US streaming media player market, and its market share is markedly higher than its next-largest competitor.

As of the second quarter of 2019, Roku had 30.5 million active accounts, and its users streamed a staggering 9.4 billion hours in that three-month period. That’s a 72 percent year-over-year increase, which illustrates the move away from cable and onto digital streaming.

For the second quarter of 2019, Roku’s net revenue was up 59 percent year over year at $250.1 million. Platform revenue increased 86 percent year over year to $167.7 million. In just one quarter, Roku added 1.4 million new accounts, and the number of hours streamed went up by 0.5 billion as compared to the first quarter of 2019.

Roku Stock Forecast 

The average revenue per user (ARPU) came in at $21.06 for the quarter, which is a $2.00 quarter over quarter increase.

Year over year, monetized video ad impressions more than doubled. All of these factors led to gross profit of $114.2 million, which is a year over year increase of 47 percent.

Looking ahead, business leaders cite multiple researchers and analysts in saying that the digital streaming market will continue to grow. Based on Roku’s solid position as a leader in its space, every sign indicates that Roku has room to grow, too. Overall, that makes Roku a solid buy.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.