You probably already own what this company sells.
And if you do, you likely use it every day.
This company makes decent amount of money by selling hardware, but it’s services division is the real diamond here.
Are we talking about Apple? Nope, our top stock pick for 2022 is ROKU.
Roku makes money from three things:
1. Selling hardware. The Roku dongles, boxes, and soundbars.
2. Subscription video services. When you signup for Netflix, HBO, or anything else on Roku’s platform, Roku gets a cut of that, usually 30%.
3. Advertising. In addition to owning it’s own channel on it’s platform, Roku required 3rd party free channel operators to give it 30% of the ad space.
While the company doesn’t break out absolute numbers, the third is considered to account for the lion’s share of platform revenue.
How big is this opportunity?
Statista estimates that $60 billion was spent on linear (traditional) TV advertising in the United States last year. Connected TV — or CTV, which is what Roku offers up — clocked in at just $9 billion. Over time, we think those figures will converge, with CTV eventually taking over.
eMarketer believes CTV ad spending will triple to more than $27 billion by 2025.
And that is just in the USA.
Not convinced yet, check out this chart:
| Platform gross profit | $296 million | $478 million | $765 million | $1,336 million | 73% |
| Average Revenue Per User | $17.95 | $23.14 | $28.76 | $40.10 | 34% |
Industry reports show Roku accounting for 45% of CTV ads, far ahead of rivals like Amazon (14%) and Samsung (12%).
Let’s take a step back and think about how Roku has bigger market share in a pretty big industry than Amazon, Samsung, Apple, Google, Facebook and Microsoft.
Even if Roku simply maintains that market share , that pie is growing so rapidly that gross profit should continue climbing.
Why now?
After capping out at nearly $500 per share at the peak of Covid, Roku shares are now down at $167.
The market seems to think that that pop it got during the pandemic is temporary and none of those users will ever watch their smart tv or Roku dongle again.
We think they are wrong because Roku is still growing fast, and has been making acquisitions in related industries: Dataxu (online advertising buying platform), Nielsen-Advanced Video Advertising (video automatic content recognition and dynamic ad insertion technologies), and This Old House (60 season home improvement show)
So, we think the price is right for this extremely fast growing company, in a fast growing industry that has a history of great execution.
