Roku’s (NASDAQ:ROKU) Business Desk Partnership Creates Robust Ad Revenue Track

investment thesis

Roku’s ( NASDAQ:ROKU ) lead has built impressively on the ad revenue catalysts the company has unlocked over the past 15-18 months.

The company stayed true to its 2024 initiatives delivers growing Adjusted EBITDA and positive free cash by developing tools, solutions and product features that are closely aligned with leveraging the growing power of its advertising platform.

Management’s three-pronged ad monetization strategy strongly signals that the company will deliver growth based on added features to its main Roku screen, growth in subscriptions billed through Roku and increased demand for ads on the Roku platform. The latter pillar is of prime importance given its partnerships with leading DSPs such as The Trade Desk (NASDAQ:TTD).

Roku’s stock is still in the red, but has broken out of correction territory, as shown in Exhibit A. of more importance is Roku’s divergent performance over the past month, which shows the company’s stock pulling back from the market.

Valuation levels still look depressed based on my analysis of the company’s valuation and I will reiterate my Buy recommendation on the company.

Improving ad demand on the Roku platform related to industry partnerships, product updates

In a previous post about Roku, I explained why I expected a boost from Roku’s ad monetization strategies. I was impressed with the company’s focus on building robust advertising capabilities for its advertising clients, expanding its ad demand by opening up its ad platform to DSPs like Trade Desk, and adding features that kept its users engaged on the Roku platform .

Since my post, Roku’s stock has gained another ~21% and I believe management’s efforts will continue to grow the top and bottom line.

Starting with Roku’s user metrics, we noticed that the user dynamics look much better than in previous quarters, which led to the sharp decline in Roku’s growth.

Roku is now used by 83.6 million active accounts worldwide, another record, while those accounts stream more hours of TV on their respective Roku devices. According to Roku’s most recent shareholder letter, Roku reported 20% year-over-year growth in streaming hours, with more than 30 billion hours of TV streaming on Roku devices.

More importantly, the company’s consolidated trailing ARPU shows a sequential improvement, maintaining management’s efforts to stem the ARPU decline seen through last year. Management attributes high user engagement as one of the reasons why Roku can get its ARPU back into growth mode.

As I noted in my previous coverage, Roku’s FAST (ad free streaming TV) channels were one of the reasons for engaged users. This can also be seen in the market share growth of Roku’s namesake Roku channel, which continues to make inroads into the Streaming TV market, now holding a 1.6% share of the Streaming TV market, up from 1.5% on which I noted in my last coverage. Roku recently expanded the programming content of its Roku Channel to include a variety of live sports content as well. This is an added benefit to keeping users engaged, in my opinion, which should give an increase in the streaming hours value that we noted earlier.

Roku is leveraging its high volume of engaged users to build more partnerships with more participants across the CTV ad network, which is already delivering results. According to its latest Q2 report, platform revenue rose 11% to $824 million, and management expects platform revenue to grow sequentially this year, putting Roku on track to achieve growth of mid-teens in CY24. In my view, this should set Roku up for mid-teens growth in CY25 as well.

My belief comes from management’s constant focus on its ad monetization strategies to increase ad demand on its platform. Partnerships have been key in this area as Roku ties up with ad network DSPs to drive ad demand. Roku expanded its partnership with Trade Desk recently by adopting the latter’s UID2 (Unified ID 2.0)an ad targeting solution.

I believe Trade Desk’s adoption of UID2 would allow advertisers to target Roku’s highly engaged user base, as noted earlier. In addition, Roku is also partnering with Currys Connected Media, a large DSP in Europe, which allows Curry’s partner brands to advertise on Roku’s platform, adding more tracks for the platform’s revenue to scale from Roku’s current levels.

The review points to unfair skepticism in Roku

Given the improvements that management has demonstrated, I believe Roku can now achieve 13-15% CAGR growth through CY25. The improved outlook helps Roku post six consecutive quarters of adjusted EBITDA.

Markets are still quite skeptical about Roku’s growth prospects, while Roku’s price is 2.4x 2025 or 2x on an EV/forward sales basis.

Compared to Roku, the S&P 500 trades at 3x forward sales and is expected to grow earnings by 6% through CY25, implying a valuation cut for Roku.

My previous expectations for Roku were to value the company at 4-5 times forward sales, which still indicates significant room for expansion in Roku’s sales multiples.

Risks and other factors to be aware of

We had noted competition as one of the factors that could affect sales of Roku devices, both sticks and branded TVs. TV and device OEMs have been a threat in the past in a market that appeared to be saturated.

However, that appears to be changing as Roku continued its impressive performance in device revenue, with device sales growing ~39% in Q2. This was very strong growth, and as we approach the important holiday season, it will be important for Roku to support these device sales trends.

eMarketer believes U.S. retail sales will be driven by e-commerce and expects to grow by single digits, surpassing last year’s growth. If that comes through, expect Roku to run with higher device sales followed by an improved ad outlook that boosts the company’s prospects. Conversely, investors can expect headwinds if retail spending in the upcoming holiday season remains at pressure levels from last year.

Take away

Roku continues to offer moderate/high risk/reward levels as markets head into the final quarter of CY24 next month. The company’s improved performance in its platform segment, bolstered by ad spending, has shifted some of the sentiment toward Roku.

But valuation levels still appear low, pointing to strong growth this year. I reiterate my Buy rating on Roku.