Could Roku become the next Netflix?

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netflix (NASDAQ:NFLX) started out as a mail-order service for DVD movie rentals, but its pivot to streaming content was the big leap that made the company the premier content provider it is today.

History does not always repeat itself, but it often rhymes. Roku (NASDAQ: ROKU) has earned a reputation for its streaming dongles and TV software.

However, it is in the early stages of its transition from a neutral streaming platform to its own source of original content. It’s currently only a tenth the size of Netflix, but here’s why Roku could one day get so big.

Clearly push for original programming

Media streaming is all about grabbing and keeping the attention of your users. For Netflix, it’s been a story of original content since its transition to streaming, slowly moving from licensing other people’s content to increasingly replacing its catalog with its own productions.

Image source: Getty Images.

Roku started out as a neutral platform for streaming. Its dongles would convert TVs into smart TVs, and it partners with TV OEMs to install its operating software on them to make them compatible with streaming. Roku has steadily grown its user base over time, growing from 16.7 million active accounts in Q3 2017, its first quarter as a public company, to 56.4 million accounts in Q3 2021. his most recent trimester.

But Roku decided that at some point it had to be more than just a way to watch Netflix or Hulu. It regularly invests in its own original programming. this effort began with the launch of the Roku Channel, a free ad-supported streaming service integrated into the Roku platform. The first content was licensed, but now Roku has started bolstering it with original programming. The company bought content from the defunct Quibi streaming service and now produces shows and movies, and recently signed a massive 240,000 square foot construction lease in New York for content production purposes.

Roku had to wait for the right time to attempt this. If he were to try this too soon and alienate existing streaming platforms, they could leave Roku, which would hurt Roku’s appeal to users. However, Roku’s skirmishes with companies like AT&T and Alphabet During contract negotiations, it became big enough to leverage through its user base, and the time was right to scale. In other words, Roku started thinking: “These streaming companies need me, so I’m not too worried about stepping on their toes anymore.”

Different approaches to generate income

I’ll say it again: streaming is about maintaining engagement on the platform. But monetizing those streaming eyeballs can be done in a number of ways. Netflix has always been ad-free, charging its viewers for the right to access the platform.

Roku is taking a different approach, becoming an advertising company under its streaming service. In other words, rather than generating revenue from consumers’ pockets, Roku appeals to advertisers. A recent Pixelate report estimated that a whopping 45% of ads on smart TV (devices that support video streaming) went to Roku devices in the first half of 2021. The report also indicated that ad spend increased 50% year over year, so Roku is capturing a big chunk of that ever-growing revenue pie.

The company’s average revenue per user (ARPU) increased 49% year-over-year to $40.10 in Q3 2021 and ARPU expansion is the main driver of revenue growth. revenue from Roku. A company like Netflix that charges the consumer now needs to be aware of competing streaming platforms, and growth is more dependent on user growth. I think Roku’s ad tech business is a stronger model because it seems more user-friendly to give users a free product like the Roku Channel with targeted ads rather than charging them a monthly fee.

Is Roku a Buy Today?

Roku’s user growth has been impacted by global supply chain issues, as well as a sell-off in technology and market-wide growth stocks, and Roku has fallen far from its previous highs. . However, it gave investors a much more attractive valuation of the stock.

Chart showing Roku's falling PS ratio and increasing revenue and free cash flow since 2018.

ROKU Revenue Data (TTM) by YCharts

The price-to-sales ratio fell from over 30 to under 10, roughly on par with its pre-pandemic valuation. Meanwhile, the company is arguably much stronger today. Revenues continue to grow, while the business becomes increasingly positive for free cash flow.

Analysts are expecting 35% year-over-year revenue growth in fiscal 2022, or nearly $3.8 billion. With the stock’s valuation at these affordable levels, I think investors could reasonably expect it to appreciate at a rate similar to the company’s growth, making Roku an investment idea. convincing.

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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Justin Pope owns Roku. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Netflix and Roku. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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