This year has taken equity investors on a wild ride. The COVID-19 pandemic crushed the stock market in early 2020 in what was one of the swiftest bear market declines ever. The snapback rally was equally unprecedented as tech stocks gained momentum pushing broader indices to record highs.

The coronavirus pandemic acted as a tailwind for several technology stocks in e-commerce, content streaming, and work from home verticals. One such company that has crushed the S&P 500 (SPY) is Roku (ROKU), a stock that has returned 125% year-to-date.

Let’s take a look if Roku can continue its stellar growth in 2021.

How does Roku make money?

Roku is one of the largest TV streaming platforms in the U.S. The company aims to drive revenue growth by increasing the number of active accounts on its platform as well as improving user engagement and by monetizing user activity on its platform.

Roku sells stand-alone streaming players and it works with television brand partners that license the Roku operating system to manufacture and sell Roku TV models. The company said around one-third of the smart TVs sold in the U.S. was a Roku TV.

In 2019, the company increased active accounts by 9.8 million to 36.9 million active users. This figure has increased to 46 million at the end of Q3, up 43% year-over-year. It allows content partners to publish streaming channels making it an attractive platform for publishing partners. The number of streaming hours on the Roku platform rose from 24 billion in 2018 to 40.3 billion in 2019. It stood at 14.8 billion hours in the September quarter.

Roku monetizes its user’s engagement on its platform through a variety of services and capabilities. This includes video advertising on the ad-supported channels, sales of subscription services as well as brand sponsorships and promotions. This monetization is measured by calculating the average revenue per user which rose to $23.14 in 2019, up from $17.95 in 2018. This figure has grown to $27 in Q3 of 2020.

Roku’s revenue was up 73% in Q3

Roku’s platform revenue that monetizes the user base now accounts for the majority of sales and revenue was up 78% year-over-year at $319.2 million. Its player revenue soared 62% to $132.4 million which indicates overall growth was 73% in Q3. The platform business is a high-margin segment and generated 92% of gross profits in the first nine months of 2020.

This stellar growth in revenue allowed Roku to report adjusted earnings of $0.09 per share, compared to a loss of $0.22 per share in the prior-year period.

Roku’s revenue growth accelerated in 2020 as several users bought its streaming devices as entertainment options were limited. The company confirmed that the Roku channel has reached 54 million people in the U.S. The Roku Channel is an application that aggregates content from publishers for its user base.

The final takeaway

Viewership trends are changing and marketing dollars or ad spend is steadily shifting towards connected TV. According to an eMarketer report, ad spending on TV is forecast to touch $60 billion in 2020 while connected TV is expected to account for $9 billion in spending. While eMarketer expects traditional ad spending to decline, CTV ad spending might rise by 28% in 2020.

In terms of valuation, Roku stock is expensive given its forward price to 2021 sales multiple of 16x. However, it is significantly cheaper than recent IPOs or other technology growth stocks such as Zoom (ZM), The Trade Desk (TTD), Shopify, (SHOP) or Snowflake (SNOW).

Roku is part of a rapidly expanding addressable market. It has a leadership position in the U.S. and Canada and is now eyeing international expansion. With an easily scalable business, expanding margins, and growth in the global streaming industry, Roku is one of the top bets right now and its stock could possibly double in size in 2021.

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ROKU shares were trading at $304.74 per share on Tuesday afternoon, up $4.76 (+1.59%). Year-to-date, ROKU has gained 127.59%, versus a 16.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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