Blaming the current downturn in the market, especially tech stocks, can be blamed for many things. TO SLEEP. Russia’s invasion of Ukraine. Rona and supply chain issues. Inflation. But we prefer our scapegoat to be Jim Cramer like Lenin. The list of controversies surrounding this former hedge fund manager makes up most of his Wikipedia entry. About ten years ago, Cramer gave us the famous name FAANG, an acronym that refers to the top five technology companies in the world (now deFAANGed as MAMAA by Cramer). Since then, investors have had a somewhat unhealthy obsession with this pantheon of corporate technology gods. This unholy tribute certainly helped balance the stock market as these five stocks accounted for almost 20% of the S&P 500 at one point. In mid-2022, they accounted for around 15% of the total value.

“N” is (was?) for Netflix (NFLX). If you weren’t paying attention because you have better things to do than streaming season 3 “Too hot to handle” – like alpha generation – the streaming services’ OG has hit a skid this year. Shares have declined by more than 60% since the start of the year after “substantial” losses in subscriptions were recorded. We use quotation marks because the number of subscribers decreased by around 0.5%. In addition, the company continued to generate over $ 3 billion in profit with over $ 16 billion in revenue in the first half of this year. The decline can be attributed to real concerns about the rise of competing streaming services, but also to a completely unrealistic fantasy driven by the FAANG fandom.

Let’s say five times really fast while introducing the Roku (YEAR), the kind of shovel grabbing and kicking game that many of our readers believe should be in any self-respecting technology portfolio.

About the Year of Stock

Roku is something of a hybrid in the streaming services industry. It was originally started as a Netflix project with the goal of building a device that would allow users to stream the company’s content directly to their TVs, much like an old-fashioned cable set-top box. History says Netflix believed that this little piece of hardware would cause licensing problems and prevent similar platforms from working when they finally did come up. So Netflix shifted this idea to a separate company called Roku, which sold its first device in 2010. About four years later, it began integrating its Roku functionality with smart TVs. In effect, Roku is an aboutoperate ssystem (AXIS) for smart TVs, similar to Android or iOS devices for smartphones. And about five years ago, the company added its own free ad streaming channel. In the same year, in 2017, the IPO Year. Revenues grew sharply from:

Annual revenues of the Year since 2015.
Source: Makrotrends

The year entered Ron’s hype cycle in March 2020 with a market capitalization of around $ 9 billion. At its peak just over a year ago, the company was worth $ 60 billion. Currently, Roku shares have been losing almost 80% since the start of the year, with a market capitalization of around $ 7.5 billion. Is now a good time to buy? If so, what is our investment thesis?

Roku is the leading operating system for Smart TVs

The title says it all, doesn’t it? An idea driving the bulls of the year for slaughter on its side is that the company is the leading operating system for smart TVs in the same way that Android is the main operating system for smartphones beyond the Apple iPhone and Microsoft Windows for PCs not built by Apple. In fact, Roku OS has been the number one smart TV OS in the United States for the past two years, according to NPD’s Weekly Retail Tracking Service. Last year, the company surpassed 50% of the market for all smart TV users:

The number of connected or smart TVs has skyrocketed and the Roku is the leading operating system in the United States.
The number of connected or smart TVs has skyrocketed and the Roku is the leading operating system in the United States. Source: nScreenMedia

It’s definitely a trend you’d like to see when betting on the long-term dominance of the OS Year. After all, Microsoft has done quite well for itself and its shareholders. If you had enough cash to invest in 1986 at the price of an IPO for the first time, you would have achieved an increase of +30,000%. Google’s dominance in the smartphone market has helped it achieve a market capitalization of $ 1.3 trillion today. However, we wouldn’t be the first to notice that the smart TV industry may not be ready to cede the market to the Roku, and major manufacturers such as Samsung have their own operating system, ad platform, and even a free ad channel.

How does Roku make money?

Of course, one of Roku’s money-making schemes is licensing its software to TV manufacturers. The company divides its revenues between two segments – platform and player. The first is basically software and services. In addition to licensing its Roku OS for TV brands, the company also generates money by selling digital advertising and other services related to the OneView advertising platform, which allows advertisers to configure, change and measure advertising campaigns themselves. Of course, machine learning helps with precise advertising, and Roku also uses AI as part of its content distribution services to help publishers reach new audiences who are more likely to subscribe to their services. This revenue stream also includes things like selling branded channel buttons to content companies like Netflix on Roku remotes. Revenue from players mainly comes from the sale of streaming players and audio products.

Revenue of the Year
Source:

As you can see, hardware sales are becoming less important as more and more smart TVs are replacing silly older TVs. This is not a surprise for Roku, which is increasingly focusing on its own channel offering (more on that soon) to provide more traffic flow (along with advertising dollars) through its platform ecosystem. Unfortunately, Roku doesn’t analyze the platform’s revenue in more detail, so we don’t know how much money is coming from advertising versus OS licensing agreements. This is annoying, especially if you want to track the progress of your ad spend or changes in the dominance of the operating system. Instead, we have to rely on other proxies for performance.

The Roku KPIs

The company touts the key performance measures:

  • Gross profit. This is obvious. Gross Profit of the Year grew 74% between 2020 and 2021, from approximately $ 808 million to over $ 1.4 billion. Based on gross income versus cost of earning that income, the gross margin increased by about 6 points to about 51%. One would expect this number to continue to improve as the departure from hardware becomes less onerous (see graph of quarterly revenues and indices below).
  • Another way Roku measures the monetization of its platform is average revenue per user, which increased from $ 28.76 in 2020 to $ 41.03.
  • Roku tracks active accounts to gauge the size of its user base who uploaded content on its platform, even if you don’t need an account to watch gems like Naturist Cleaners (NSFW) in your browser. So 60.1 million active accounts at the end of 2021 do not include streaming on platforms other than Roku. The number of active accounts increased by 17% compared to last year.
  • Finally, the company tracks hours of streaming on its platform – how long people stare at their screens. Streaming hours increased from 58.7 billion hours in 2020 to 73.2 billion hours in 2021, a 25% increase. In the short term, based on Statista data, full-time Americans worked around 230 billion hours in their jobs last year. Just think how much time they can spend on the Roku platform!

Should you buy Roku stocks?

In an effort to do so, Roku invested in its own content, in addition to selling subscriptions to other streaming services and leasing programs for its free ad-supported channel. For example, in May 2021, it launched Roku Originals, based on a content library she bought for less than $ 100 million from Quibi, a $ 1.75 billion disaster that involved streaming short shows to mobile devices. This saved programs worthy of Emmy as Murder House Flip, a home renovation program focused on homes where gruesome homicides have occurred. Children, come together! Last year, she also acquired the rights to This Old House, a slightly less dark DIY approach. The Magnum opus of the Year, a fictionalized biography of Weird Al Yankovic, will be released next month.

Content may be king, but you’d have to be a fool to invest the money Roku and others spend on one-off entertainment that passes as entertainment today. Perhaps our prejudices blind us to the possibility of overlapping the show after the series, but the ad dollars can only back up some fluff. To our point: the latest report of the Year for the second quarter of 2022 noted that “there has been a significant slowdown in television advertising spending”. The company has lost nearly $ 140 million in 2022 so far, and has mostly been in the red for most of the years.

Last five quarters of revenues and stocks of the Year.
Last five quarters of revenues and stocks of the Year. Source:

We should also note that most of this financial data relates to the US performance of the Year. Today, its products are used in more than 20 countries, and Roku OS is available in six countries. However, everywhere outside North America, the Year has a single-digit market share for watch / streaming time, according to Conviva, an online video analysis and optimization company.

Regional distribution of streaming platforms.
Outside the US, the Year is ahead of competitors such as Samsung and Amazon. Source: Conviva

The year has yet to consistently find profitability. Ad dollars have fallen, which means less money (or greater losses) spend on questionable content to increase engagement. The long-term dominance of the Year of OS in the United States is not exactly ensured, and the company has so far been striving to significantly expand internationally. It’s a drama we wouldn’t pay to watch.

Application

After all, does someone buy a laptop, smartphone, or even a smart TV for their operating system (outside of Steve Jobs golf)? We want our devices to do cool things and not give us a blue screen of death. Television remains mostly passive entertainment, with endless ways to waste your time. Roku should focus on its core competencies – constantly improving its operating system; innovative ways to generate advertising money, such as a new partnership with Walmart to include purchaseable ads – and ditching tacky content. After the movie, Weird Al. It looks quite fun.

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