A leader TV streaming has bulked up its ad business
April 30, 2019

From Stansberry Research:

Sometimes the market needs to "take a breather"...

After a long bull run, an occasional dip is the price we pay before stocks can continue to soar.

When the stock market sold off late last year, many investors worried a bear market had finally arrived...

But drawdowns of 10% or more are normal at this stage in the bull market. They're even good for it.

This is a key part to a phenomenon that Dr. Steve Sjuggerud calls the "Melt Up"...

The final months of a bull market tend to bring the biggest gains for stocks. It's the last push before a "Melt Down" arrives.

This historic bull market must come to an end at some point... But there are still big gains ahead.

Today's company is a leader in a transformational industry – which is just the kind of business that could soar during the Melt Up.

These days, "streaming" is quickly replacing traditional TV. Consumers can now get the shows and channels they want without the associated costs of a hefty cable bill.

Cord cutters are now ditching traditional cable packages by the millions. Just take a look at some of these numbers on the streaming industry...

People stream 140 million hours of movies and TV shows on Netflix (NFLX) per day. Nearly a third of sports fans use streaming technology to watch their teams play. And viewers around the world watch more than 1 billion YouTube videos daily, with the average viewing session lasting 40 minutes.

Since its beginning in 2002, Roku (Nasdaq: ROKU) has become a leader in the Internet streaming industry.

Roku means "six" in Japanese... And it was the sixth company founded by Anthony Wood.

Wood predicted the change in consumer taste even before the technology was ready. He knew most of the world's entertainment – movies, videos, sporting events, and music – would soon be streamed over the Internet.

So Wood's new company began selling small set-top boxes that could turn virtually any TV into an Internet streaming machine.

What Roku is most known for today is its hardware. These devices are "sticks" – similar to a flash drive – that are just a few inches long and can be plugged into the back of a TV.

Through Roku's hardware, users can stream content from multiple providers. It made it easier than ever to get entertainment content from Netflix (NFLX) or Hulu directly to your TV... But users still had to subscribe to one of these platforms.

This made Roku very valuable to streaming services...

You see, every Roku stick sold was a potential subscriber for Netflix or Hulu or any other streaming service out there. Netflix loved this opportunity so much that the company even became one of Roku's earliest investors.

This symbiotic relationship gave Roku a huge edge over its competitors.

And Roku took advantage...

The best strategy for streaming services is all about getting as many users as possible... And Roku's stranglehold on the market is unmatched.

Roku has 27 million active accounts, taking up 37% of the streaming market. That's despite heavy competition from well-known brands like Amazon (AMZN), Alphabet (GOOG), and Apple (AAPL).

Roku isn't stopping there...

The company is launching another important (and capital-efficient) revenue stream – software.

By 2015, Internet-ready televisions called "smart TVs" began coming off assembly lines. Unlike earlier models, these TVs don't need sticks from Roku... But they do need operating software to stream content.

As the established leader in streaming, Roku was in a perfect position to offer streaming-capable software to TV manufacturers.

Roku has built itself into a market leader here as well. Today, one out of every four smart TVs sold in the U.S. contains Roku's software.

And here's the best part...

Unlike the old, clunky hardware business, licensing software to TV manufacturers is an extremely capital-efficient, high-margin business. There are no parts to source or products to hold in inventory... just software to license.

While Roku's business lacks the recurring revenue stream that subscription-based content providers like Netflix enjoy, the company has begun to enter the advertising market.

Roku knows a lot about its customers. It also infers important data by mining viewers' search habits.

Like Alphabet and Facebook (FB), Roku can use this data to offer powerful "targeted advertising," which is proven to be more effective than traditional TV ads.

Ads run between programming on "The Roku Channel," a completely free service for viewers.

These business changes should help Roku continue growing revenue and profits.

After years of focusing strictly on growing its subscriber base, Roku has shifted its focus to converting these users into revenue. As recently as 2015, Roku's hardware business accounted for 84% of its revenues.

Since then, all of Roku's growth has come from its software and advertising businesses. Software and advertising revenues have more than quadrupled over the past two years.

Last year, hardware revenue made up just 44% of Roku's revenue... And in 2018, software revenue surpassed hardware revenue for the first time. Gross margins for the software and advertising segments are seven times higher – around 70% versus 10% for the hardware segment.

This is fantastic news...

As Roku monetizes more users, these trends in revenue and margins should continue.

Revenue is expected to grow to more than $1.7 billion in 2021 – more than double the revenue of $742 million made by the company in 2018.

And shares of Roku have absolutely soared.

Since bottoming on Christmas Eve at $27.17, the stock has more than doubled in price to around $63. It's up more than 120%.

Today, streaming is revolutionizing how people get their entertainment. More and more people are upgrading to smart TVs... And Roku is positioned to profit from these changes.

As the Melt Up continues, even more gains could be ahead.

Sometimes investing is simple.

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