Roku vs The Trade Desk Stock: Which Is Best? - Financhill

Roku vs The Trade Desk Stock: Which Is Best?

Roku Vs The Trade Desk Stock: Roku, Inc. [NASDAQ: ROKU] offers wireless enabled devices that stream free, ad-supported audio and video content such as television episodes, movies, sports, music, news, and a variety of internet radio stations from the internet to consumer’s televisions.

The company boasts of a television streaming platform that connects TVs or home entertainment systems to the internet and delivers digital content through a variety of digital media players.

The Trade Desk Inc [NASDAQ: TTD], on the other hand, is a global advertising technology company that offers a self-service cloud-based platform used by clients to purchase and manage data-driven display, social, mobile, and video advertising campaigns across various ad formats and devices.

Both TTD share price and Roku stock have been on a tear in recent years, rocketing higher, but which is best?

Roku 101: A Netflix Spinoff?

The company that pioneered streaming to the TV operates in two segments: Platform and Player.

Its Roku platform allows users to discover, personalize and access various movies and TV episodes as per their own need and budget.

Roku started as a unit of internet television network Netflix, making the company’s first set-top box. But Netflix decided to not build its own player, so it divested the business in 2007.

After the divestiture, Roku continued with set-top boxes but also ventured into manufacturing streaming sticks to enable consumers access internet video services such as Netflix, Hulu and Amazon, among others, from a single place.

Its product categories include advertising, Roku TVs and Streaming Players. The company offers streaming media players and accessories under the Roku brand name and sells branded channel buttons on remote controls.

Roku streaming devices are used by millions of consumers in the United States, Canada, Mexico, parts of Europe, including the UK, Ireland and France, and various Latin American countries.

Roku was founded in October 2002 as a limited liability company (LLC) by Replay TV founder Anthony Wood who decided to name it Roku (“six” in Japanese language), to emphasize the fact that Roku is the sixth company started by Wood.

Today, Roku generates a major portion of its revenue from selling advertising on its platform, including commercials for ad-supported services such as its own Roku Channel.

Additionally, it takes a share of pay-per-view and subscription revenue from third-party services sold through its platform. The San Jose, California-headquartered company went public in September, 2017.

The Trade Desk At A Glance

TTD is the largest independent demand-side platform (DSP) providing real-time ad pricing and placement for advertisers on various devices such as computers, mobile devices, and connected TV.

It also provides data and other value-added services. The company serves advertising agencies and other service providers and brands.

The Ventura, CA-headquartered company was founded by Jeffrey Terry Green and David Pickles in November 2009 and went public in September, 2016.

Roku Is Riding The Cord Cutting Wave

The pandemic has left behind it a trail of unimaginable horror and destruction. It has, so far, killed over a million people and has left the world economy in tatters. However, some companies have risen like a phoenix from the ashes, thanks to widespread lockdowns and stay-at-home restrictions.

One of the big winners to have emerged, as people adapt to the new lifestyle, has been Netflix [NASDAQ: NFLX]. The Los Gatos, California-based media-streaming company surpassed 190 million subscribers in Q2, and despite easing lockdowns and life limping back to normal, shows no signs of slowing down.

Likewise, Disney [NYSE: DIS], despite having to contend with a host of other issues, witnessed its streaming service garnering more than 100 million paid users.

Other content providers, such as Apple [NASDAQ: AAPL] and Amazon [NASDAQ: AMZN], are also enjoying a record jump in their subscriber numbers, and amidst all this growth, Roku has been quietly riding the coattails of surging streaming success.

Streaming is in fad while cable TV is old-school. Major pay-TV operators lost more than 6 million consumers in 2019, in the process playing second fiddle to video subscribers for the first time in history.

As the pandemic continues to fan stay-at-home trends, consumers are turning in droves towards streaming services for their entertainment needs, and Roku stands to gain a lot from this phenomenon. 

Analysts say Roku is riding on the wave of “cord cutters” and “cord nevers” — people doing away with their traditional pay TV services or never signing up for them.

Also, helping Roku’s cause to a great extent is consumers’ preference for free, ad-supported internet video networks to keep their entertainment budget within a manageable limit.

Roku had the clairvoyance to foresee that subscriptions for video-on-demand would quietly make way for ad-supported video-on-demand as consumers reach a limit for how many services they’d be willing to pay for.

Roku provides a service that is not tied to any particular streaming service provider. What it means is that you can watch content provided by Netflix, Hulu, Amazon or whatever catches your fancy at one convenient place.

Roku Has Over 40 Million Active User Accounts

Increased usage in the sector amid the home entertainment boom allowed Roku to reach 43 million active user accounts in the June quarter, a massive gain of 3.2 million from the prior quarter, while it reported 14.6 billion streaming hours, up 65% year over year.

Its user base grew 41% year over year. Analysts were expecting about 41.5 million active accounts and 14.4 billion streaming hours.

This comes on top of revenue of $356.1 million, which beat the highest analyst estimate of $349.0 million. Average revenue per user climbed to $24.92 in the second quarter, an upswing of 18% from the same period in the prior year.

Another strong motive to invest in Roku is the enormous opportunity it enjoys for international growth. Having tasted unprecedented success in the U.S. and Canada, Roku is just getting started on its international expansion.

The streaming video platform decided to expand into Europe and Latin America last year and, as of now, it operates in more than a dozen countries, including the U.K., France, Mexico and Brazil.

The global video streaming market is expected to be worth around $700 billion by 2024, which roughly translates into a CAGR of about 19% from 2019–2024. This signals a very bright future ahead for Roku as it is brand-agnostic i.e. not tied to  any particular streaming service provider.

Roku is concentrating heavily on expansion, which is the reason it currently operates at a loss as it invests to enhance its global footprint, and its advertising-supported video-on-demand services.

In the second quarter, the company reported a net loss of 35 cents a share on sales of $356.1 million. Analysts were expecting Roku to lose 55 cents a share on sales of $315 million.

In the year-earlier period, Roku lost 8 cents a share on sales of $250.1 million. Roku declined to give a formal forecast for the second half of the year.  In a letter to shareholders, it wrote that “the short-term outlook is both variable and uncertain.”

The company’s platform business, primarily concerned with advertising, contributed 69% of revenue in the June quarter, while the remaining 31% of sales came from Roku’s hardware unit.

The non-ad-based revenue increased, a very welcome sign for Roku as advertising spending had weakened during the contagion, owing to many advertisers pulling slots due to the economic uncertainty. This was, however, compensated to some extent as advertisers continued to ditch traditional TV in favor of Roku.

Investors have taken notice of its key position, especially as more people opt for streaming during the ongoing Covid-19 pandemic. This is reflected in the astonishing rise of Roku shares which are trading near record levels.

Is The Trade Desk Stock A Buy?

The Trade Desk, in a manner similar to Roku, has been adroitly navigating its business even as the pandemic rages and puts a lot of companies under severe economic duress.

The leader in buy-side, data-driven advertising reported first quarter numbers that were not exceptional but, nevertheless, exceeded analysts’ expectations.

The technology company reported $139.40 million during the quarter in Q2 2020 revenue compared to analysts’ expectations of $133.03 million.

It earned $159.9 million during the same period a year ago, down 12.8%. It reported $0.92 earnings per share for the quarter, which was slightly below the $0.95 per share a year ago but well above analysts’ expectations.

Major growth in Connected TV (CTV) ad spend (which rose 40% year over year) and solid Q3 guidance are major confidence boosters for investors.

Mobile video ad spending and audio spending also stood out, jumping 15% and 20%, respectively. The guidance for Q3 revenue is an increase of 8% to 10% year-over-year of between $177 million and $181 million.

More importantly, the stock is still undervalued relative to the company’s long-term growth potential which makes it a compelling buy.

What investors should also understand is that the situation is not as dire as it was at the beginning of the pandemic. The economy, slowly but surely, is starting to re-open, and that businesses are now adjusting their ad spending, instead of hitting the “pause button” as they were doing at the beginning of the crisis due to uncertainty surrounding the COVID-19 pandemic.

All these are pointers to the fact that the worst of the coronavirus’ effect on the technology company is over to an extent.

Going forward, the economy will be back on track, advertisers will again loosen their purse strings, and the growth prospects of the data-driven advertising company will offer a more optimistic picture.

Also, the battering the economy has received because of the pandemic means that the advertising budget has been severely curtailed. It means that every single advertising dollar is to be cautiously and prudently spent.

And the most judicious way to maximize return on your ad spend is by employing data-driven advertising, which allows businesses to measure the ROI of every advertising dollar.

As such, more firms are likely to take the data-driven advertising space, thus benefitting The Trade Desk in a major way.

Investors should also take note of the fact that The Trade Desk’s numero uno position in the buy-side, data-driven advertising space, is undisputed. And the gap between The Trade Desk and its competitors continues to widen, thanks to its innovative practices and its sagacious partnerships, which widen the reach of The Trade Desk’s ad platform, and endear it to multi-channel advertisers.

Connect all these dots and you realize that the company has a great future ahead. Data-driven advertising is the future of advertising and The Trade Desk enjoys a leadership position here.

Because of the huge potential and a mammoth addressable market, analysts expect the company to enjoy 20%-plus annual revenue growth and profit surge of more than 25% per year over the next few years.

The Bull Case For Roku

Roku has somewhat developed a habit of delivering beyond expectations.  The company’s user base grew a massive 41% from the year-ago period to reach 43 million.

Revenue jumped 42% to $356 million, far ahead of the consensus estimate of $315 million.  Roku, however, is still not profitable and the decreased ad revenue owing to the pandemic is going to further exacerbate the problem. 

The company has been forced to pull guidance, but losses could range between $160 million and $180 million in 2020.

Experts, though, argue that it is a minor glitch as the company is concentrating all its efforts on building a huge user base and increasing its sales, while putting profit on the backburner at least for the time being.

Some experts are even going a step further, comparing the media-streaming technology expert to streaming giant Netflix [NASDAQ: NFLX], arguing that it is following the same hypergrowth model as did Netflix in its early days.

Let’s go back in time to compare the world’s leading streaming entertainment service provider’s performance when it was purely a movie rental service.

The company, founded in August of 1997 by two serial entrepreneurs, Marc Randolph and Reed Hastings in Scotts Valley, California, generated $360 million in revenue in the fourth quarter of 2008. Today, it has over 193 million paid subscribers in over 190 countries.

However, when it started, it had 9.4 million subscribers which still exceeded analyst expectations across the board. The revered Wall Street Journal argued that the company’s business model of renting DVD-by-mail was unsustainable and it was very poorly equipped to compete in the cutthroat realm of digital delivery.

It was the time Netflix decided to venture into digital streaming services and the rest, as they say, is history.  Over the next decade or so, Netflix would prove all doubting Cassandras wrong.

Now, for millions around the world, Netflix is the de-facto place to go for movie and TV streaming with its content alone consuming about 15% of all the world’s internet bandwidth.

With a market cap of over 215 billion, it continues to deliver explosive returns for investors with its stock up more than 50% since the pandemic struck.  Investing around $10,000 in Netflix at the end of 2008 would have made you a millionaire today.

Coming back to Roku, the company is currently fully preoccupied with augmenting its subscriber base and revenue, hoping it can reap the benefits of its current efforts in the form of tremendous profits many years down the road.

However, being best in business does not make you invincible in this age of globalization, technical innovation and cut-throat competition.

Take the example of automobile giants like Ford [NYSE: F] and General Motors [NYSE: GM]. They ruled the market like kings but today find themselves dwarfed by Tesla [NASDAQ: TSLA].

Likewise, Roku is not without competition with so called ‘Big Techs’ jumping into the fray. Amazon’s Fire Stick, Apple TV, and Google’s [NASDAQ: GOOG] Chromecast are Roku’s main competitors.

As streaming gains widespread popularity and acceptance around the world, the likes of Comcast [NYSE: CMSCA] and AT&T [NYSE: T] have also invested in their own direct-to-consumer, brand-agnostic boxes.

All of a sudden, Roku finds itself surrounded on all sides by competition.

Irrespective of the heating competition, Roku has a first-mover advantage.

Roku may be a one-trick pony, but then sometimes being Jack of all trades and master of none is not really required. 

The world health crisis is only going to accelerate streaming’s popularity, while cable TV declines. Roku’s growth prospects are immense and the stock is really undervalued which makes it a perfect time to add it to your portfolio.

The Bull Case For The Trade Desk

Cord cutting reached unprecedented levels last year, as major pay-TV operators reported losing close to 5 million customers for the largest single-year decline in cable TV history.

This weakening of cable TV viewership is not new as the biggest pay-TV operators lost close to 2.90 million customers in 2018 and 1.49 million in 2017.

Advertisers are approaching these consumers through other venues and this is where companies like The Trade Desk, which enables clients to purchase and manage data-driven digital advertising campaigns, make their presence felt.

The pandemic and the chaos it has unleashed has forced majority of companies to curtail their advertising budgets. This cramped The Trade Desk’s results, but the company still reported higher sales for the first half of 2020.

Also, the drop in advertising budget is expected by a minor headwind for the company as the flexibility and the innovation that the company’s cutting-edge platform offers to advertisers gives them a bigger bang for their buck. 

It can process 9 million ad impressions and quadrillions of permutations each second which, in turn, maximizes the probability of the ad being viewed by its target market.

The Trade Desk is a leader in the buy-side programmatic advertising market, a small but rapidly growing segment of digital advertising.  More importantly, Connected TV (CTV) offers a massive growth opportunity for the company.

The Trade Desk CEO Jeff Green recently stated that “the COVID-19 pandemic has permanently accelerated the growth of connected television, changing the TV landscape forever.”

He added, “And no company is better positioned to grab a share in CTV than The Trade Desk.” Experts believe his assumption to be spot on as the contagion has massively contributed to the popularity of streaming TV services, which, in turn, is going to be highly beneficial for the company.

The company boasts of an incredibly impressive retention rate of around 95% for the past five years. The pandemic is likely to bring many first-time advertisers to its platform and, in all probability, the company will retain them for a long time.

The Trade Desk generated a revenue of $661 million last year while the total amount spent on programmatic advertising market in 2019 was a whopping $29 billion. This demonstrates the company’s scope and ability for expansion, which, in turn, makes The Trade Desk a very lucrative stock to invest in right now.

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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.