No one would have ever imagined the huge gains that 2020 will bring to investors. Although the 14% increase in the S&P 500 accumulated in the year is certainly not bad in itself, it was a particularly good year for technology investors. The high-tech Nasdaq Composite has an incredible 45% increase.
With so many tech stocks skyrocketing this year, many of the best companies on the market now trade with valuations that are difficult to justify. So it can be surprising when you hear that my main stock pick is a technology stock that has risen more than 160% in the past 12 months.
My main stock for 2021 is none other than Roku (NASDAQ: ROKU) – a TV streaming platform specialist that you have a good chance of becoming familiar with, at least from a consumer perspective. After all, Roku dominates the smart TV operating software market in the United States, with approximately 38% share in the lucrative and rapidly growing market.
Image source: Getty Images.
Impressive growth
A cursory look at Roku may make you think the share price is overpriced. In fact, stocks are currently trading at almost 30 times sales. This is triple Facebookprice / sale ratio of the company. But a deeper understanding of the company’s fundamental moment and its huge market opportunity shows why it is worth paying for these shares.
First, investors must realize that Roku’s revenue is increasing. Total revenue increased 73% year-over-year in the most recent quarter. The platform’s revenue, which represents 70% of total revenue, increased 78% year-over-year. With such growth, Roku’s price / sale ratio could fall quickly, considering that the stock is trading at 19 times next year’s sales.
It is important to note that Roku’s incredible revenue growth is fueled by some powerful catalysts. For example, the company’s active accounts, streaming hours and average revenue per user increased 43%, 54% and 20% year-over-year, respectively, in the third quarter. While some investors may assume that these figures represent a major acceleration from pre-pandemic levels, when people were not taking shelter at home, this is not the case. Active accounts for the fourth quarter of 2019, streaming hours and average revenue per user increased 36%, 60% and 29%, respectively. The point is that Roku has achieved a leadership position for itself in a fast-growing and resilient market. Therefore, its rapid revenue growth rates are likely to persist. Of course, some slowdown will occur naturally over time. But any slowdown is likely to occur very gradually.
A great market opportunity
But this is where Roku’s growth story gets even more attractive. As a supplier of the dominant connected TV platform (CTV), the company participates in all the main winds of the CTV market – whatever they may be. With 46 million active accounts, the Roku platform is critical for any publisher when it comes to reaching a mass market audience. Whether programs reach customers through ad-based programming or subscription, Roku will have a share of the savings.
The TV advertising market, in particular, looks like a huge opportunity for Roku. Spending on CTV-based ads is expected to total about $ 8 billion this year, with more than $ 50 billion in ad spend still going to traditional TV. As sports finally start making their long-awaited move from traditional TV to following viewers’ eyes and all the attention to streaming, this expensive content will still need to be funded by ads. It is just too expensive to continue without it. Furthermore, the sports advertising opportunity is very attractive for marketers not to continue to pursue – especially in a more data driven and data driven environment.
Roku silently built one of the most valuable advertising platforms for the next decade: OneView. The TV-focused ad platform reaches four out of five households in America. As advertising dollars continue to shift from traditional TV to streaming, Roku is well positioned to capture a large portion of that spending.
A TV with Roku. Image source: Roku.
A reasonable assessment
Still, some investors may have some hesitations about Roku’s valuation. Even an assessment of 19 times next year’s sales is a considerable prize. In addition, Roku is still in investment mode. This means that significant profits can take years.
However, I believe that a few simple projections can help illustrate why Roku’s actions deserve their current assessment. Based on analysts’ average forecast of revenue of $ 2.4 billion in 2021, annual revenue could reach $ 25.5 billion in 2030 if Roku achieves an average annualized growth rate of 30% beyond 2021. Assuming that the technology company can achieve a 20% net profit margin on these sales (about two-thirds of Facebook’s 30% net profit margin today) and command a price / profit ratio of 30, Roku could have a capitalization market share of $ 153 billion in 2030, compared to $ 46 billion today.
This projection is undoubtedly oversimplified. It can be very conservative or even a little aggressive. But given Roku’s huge opportunity to gain traditional TV participation only in the United States, and the fact that Roku is barely starting internationally, this basic math is enough to keep me betting on this fast-growing technology company – even in your assessment today.
What are the risks?
As with any individual stock, there is no guarantee that an investment in Roku will work. Not only should investors expect great volatility, since it is a growing stock, but it is possible that unforeseen challenges may arise or that competition will prove to be more formidable than expected. Roku’s competitors are tech giants with big pockets, including Alphabet, Appleand Amazon – and they mean business.
But I believe that Roku’s positioning as an independent platform, as well as its initial leadership in the market, are likely enough to continue to win the favor of content publishers, marketers and viewers. Roku’s bargaining power with these key stakeholders is likely to continue to improve. In the long run, therefore, I believe that today’s investors in Roku shares have a good chance of being rewarded generously.