Fun fact: the Roku (NASDAQ: ROKU) name comes from the Japanese translation for ‘six’ as it’s the sixth company built from the ground up by founder and CEO, Anthony Wood.
If you haven’t heard of Roku before, it manufactures smart TV devices and uses an operating system (OS) platform that facilitates streaming services. It doesn’t compete with the likes of Netflix — it works with them — what it’s actually disrupting is traditional cable and home cinema options.
Here are a couple of reasons to add Roku to your watchlist.
Roku’s renewed partnership with YouTube
The pair have been playing cat and mouse for months, but have finally come to a mutually beneficial agreement. Roku fought back initially, by removing YouTube TV from its selection, but Google then threatened to pull its official YouTube app, and the two have since come to an arrangement.
Realistically, it was likely more to do with financial compensation negotiations, but it worked out in the end. Google will benefit from increased usage from Roku’s 56.4 million active accounts, and Roku will benefit from YouTube’s two billion monthly visits.
Roku’s international opportunity
Roku is already the top smart TV OS in the U.S. and Canada, but it has no intention of stopping there. The company launched in Mexico in 2015 and has quickly become the #1 TV streamer in the country.
In 2017, Roku moved its efforts to the greater Latin America (LATAM) region, launching in Argentina, Chile, Columbia, and Peru; with a combined population of more than 145 million people.
More recently, Roku opened a new office in the Netherlands to break into the European market, so it’s well on its way to penetrating plenty of new, untapped markets for continued growth.
Roku’s growth potential
Unlike many growth stocks, Roku has actually achieved profitability. Sure, its valuation still looks a bit steep based on a price to sales (P/S) ratio of 11 and a forward price to earnings (P/E) ratio of 111, but the stock grew year-over-year revenues by 51% in its most recent quarter and grew average revenue per user (ARPU) by 49%.
Currently, Roku’s total addressable market (TAM) is estimated to be more than $50 billion, but it is expected to grow at a 21% compound annual growth rate (CAGR), or $224 billion, by 2028.
Where it’s sitting now, around $140, Roku is more than 40% off its 52-week highs amid the growth stock sell-off, so if shares were to rebound to historic highs in the future, it would represent a 90%+ gain from current levels.
Roku illustrates a lot of potential for growth investors but it’s definitely not indestructible. There is increasing competition from the likes of Amazon and Apple, which both offer similar products so we’ll have to see if they decide to bully the little guy. That being said, big tech’s entry in the market validates how big the potential market growth really is, and for now, the top dogs have played ball by partnering with Roku.
Financial Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.