Within a remarkably short time, Roku has changed the entire landscape of TV advertising.
In a time when we’re seeing the most sweeping changes to television since they first became universal in households over 60 years ago, Roku is leading the effort to upend the standard advertising model - and they’re going to succeed in doing it.
On top of that, Roku is taking market share from Amazon and has Walmart, Target, and Costco in its sights as well.
ROKU is Outsmarting Amazon
Amazon recently announced an exclusive deal with Best Buy to sell its branded TVs with the Amazon streaming operating system.
At first, this move sent AMZN stock soaring and ROKU stock plunging.
But in reality, this Amazon deal meant Roku could now have free reign to target Walmart, Costco, Target, and any other retailer you can name. This was good news for ROKU and perhaps a sign of some desperation from Amazon.
And here’s the best part: Best Buy is still keeping all Roku-powered smart TVs.
In fact, Roku powers the operating system for smart TVs made by:
Note that TCL is the second-best selling smart TV in the United States.
Westinghouse dropped Amazon for Roku.
And Hisense is the fourth best-selling smart TV in the United States.
In fact, Hisense partnered with Roku in the United Kingdom for its first international push.
In total, one-in-three smart TV’s sold in the United States is powered by Roku software.
But that’s just a subplot, it’s not the main story.
ROKU & Walmart
Wall Street still does not seem to grasp the threat to Amazon in the years to come.
Let us not forget that while Best Buy and Amazon may agree to a streaming TV…
Amazon is also trying to bankrupt Best Buy with its low-priced e-commerce.
In addition, Walmart, the nation’s largest retailer, is attacking Amazon’s e-commerce dominance with its own efforts, and the results are remarkable – 36% e-commerce growth at Walmart reported in the latest fiscal quarter.
And, so, while it did take a little longer than we expected, the real news finally came out in early October of 2019. Here it is:
Roku to launch budget Walmart-branded soundbar and subwoofer.
The Roku Smart Soundbar is an easy way to add high-quality sound and powerful streaming to a TV.
Exclusive to Walmart, both products will be available within the coming weeks in Walmart stores and on Walmart.com for $129 each.
Yes, now Roku has an exclusive with Walmart, and Walmart has a vested interest in the success of this product because it is the Walmart brand.
Roku’s new deal with Walmart is just the latest in a series of partner-based deals.
Remember the 11 TV manufacturers from above? Walmart is just the partner — but this time into a different part of the hardware and software stack.
So what does this mean for investors?
Roku is fulfilling its #1 business goal right now– to become the operating system that powers all of streaming video.
Just like Microsoft was the operating system to PCs, and Android and iOS are the operating systems for smartphones – ROKU will be the clear leader of television.
Their leadership in streaming television led to 36% revenue growth in player unit sales in the latest quarter – the highest growth rate in over 2 years. And their licensing platform is growing even faster, with revenue surging 86% year-over-year in the last fiscal quarter.
A New Shift in TV Advertising
On October 9th, 2019, Roku made an announcement that will soon transform the entire Television industry.
The company introduced a new advertising platform in its latest operating system update.
All new Roku Smart TVs (all of those manufacturers) will have interactive pop-up ads during regular TV commercials. And this is where it gets really exciting.
The ads are designed to augment the message of the commercial, inviting viewers to engage further with the brand for both streaming and cable TV.
In other words, if you like a TV commercial, you can click on the TV like a mouse for more information.
That’s right, a TV ad you can click!
This will be industry shattering for the TV advertising market. Gone are the days of advertisers simply guessing at TV ad efficacy.
This. Is. Enormous. News.
In the U.S. alone, the non-streaming TV ad market is worth over $70 billion a year.
Roku’s revenue for 2019 is set to be just above $1 billion.
But Roku is not limited to the U.S. – this new ad unit rollout will be going international.
Wall Street still doesn’t get the full picture, but this is the next evolution of ads and TV.
Forget about Facebook being a social media website, that’s just a front…
Facebook is an advertising platform that is better at tracking ad spending than prior forms of advertising. They are better at giving a clear picture of what kind of reach the ads are getting.
Roku has been doing the same thing for TV, as we said two years ago.
And on top of that, “click and buy” from TV sounds mighty tasty to the giants like Walmart and Google. Roku is already getting interest from the largest companies in the world to compete with Amazon.
But how does this all work?
Let’s outline the secular trends in play, and pay special attention to the way ads on TV have worked for decades — and failed.
Roku is Changing TV Advertising Forever
According to Magna Global, a giant in the advertising world, streaming now accounts for 29% of all watch time.
However, the percentage of time spent watching those ad-supported streaming services and the percentage of ad budgets marketers put toward them are way out of proportion.
Magna Global reports that just 3% of television ad spend goes to streaming services, while 29% of eyeball hours are on streaming services. But those numbers will soon catch up.
That means even as Roku is set to top $1 billion in revenue this year, with its current base of 30.5 million users, the upside is tremendous. This mismatch between eyeballs and dollars for ads is common in the advertising world.
Back in 2012, spending on social media, increased by 3.5%.
Fast forward to 2019, and chief marketing officers (CMOs) in the United States expect to expand their social media spend by 71% in the next five years. Social spend accounts for 12% of the total marketing budget today, and CMOs expect to see it rise to 21% in the next five years.
Yet even with all of that — with all that we hear about Google and Facebook, still, as of today, traditional ad spend is larger than digital ad spend:
Now, the streaming world is growing at a pace really few could have imagined.
Right now, 29% of all watch time comes via streaming. That is mind-boggling. And we’re just getting started with this new trend.
Those ad dollars are already pouring into streaming video, and the wave is so early that we’re still talking just proverbial drops in the bucket.
The viewership numbers and ad dollars will align — just as the eyeballs on social media and ad dollars aligned.
Now, note Roku new ad unit — a pop-up ad that aids the advertiser so a TV ad turns into a web ad. Yes, a TV ad you can click!
But this is not happening in a vacuum. This was a staged release.
How Roku Discovered TV Advertising
On May 22, 2019, Roku announced Activation Insights, a powerful new tool to target audiences that have shifted to streaming. The capability combines a comprehensive review of a brand’s traditional TV campaign performance, with an analysis of the potential streaming audience missed and the optimal budget spend on the Roku platform.
Activation Insights is part of Roku Ad Insights Suite, which helps brands measure campaign reach and effectiveness across traditional both TV and streaming.
With Roku’s 30 million active accounts, brands can now better model their ad investment with Roku and estimate an unduplicated, incremental audience – whether that audience is light TV viewers and cord-cutters, or viewers who were under-exposed to a brand’s ads on traditional TV.
Then Roku actually divulged some pretty detailed information about specific brands and their failures with traditional TV.
Here is a quote:
“86% of people age 18-49 who saw a Baskin Robbins ad on the Roku platform did not see the same ad on traditional TV, leading to a 10.6% incremental reach.
Additionally, 81 percent of users age 25-54 who saw a RE/MAX ad on the Roku platform did not see the ad on traditional TV, leading to a 9.2 percent incremental reach.”
What is so compelling about this specific data is how early we are in this streaming revolution, and yet still, the reach is already tremendous.
Here is more from the Roku press release:
“This year’s TV upfront made one thing very clear, streaming is the new cable and powerful new video channel to reach today’s consumers,” said Michael Piner, SVP, Video and Data Drive Investments, MullenLowe.
“Roku’s tool helps show us just how effective streaming is at reaching our advertisers’ valuable consumers. It gives us a detailed look behind the GRP, allowing us to identify key audiences we’re missing or over/underexposed to Traditional TV ads but that can be effectively reached on their Roku devices.”
The traditional TV advertising market — that is the ads on ‘normal’ TV globally, is at over $200 billion. Here is the chart from Statista.
TV advertising expenditure worldwide is expected to grow to $228.8 billion.
The portion of that in the United States is forecast at about $75 billion
But, pay-TV (aka cable TV) subscriptions are plummeting.
Stop here for a second.
This doesn’t mean people are “watching less TV” – they actually watching MORE TV.
Video streaming is rising dramatically. This means the number of households canceling their cable service and replacing it with streaming services is rising.
In fact, take a look at this cord-cutting trend:
By 2020, 55% of people will not be paying for cable.
But here is the average weekly time spent watching streaming video:
Now we know, for the first time ever, that over-the-top (OTT) streaming video services are more popular than pay-TV services.
And in another warning for cable TV, 69% of millennial households reported a video streaming subscription compared to just 65% for pay-TV.
So, we have not only a secular shift that is accelerating, but a generational shift far more abrupt than the mainstream media has been covering.
At some point in the future, we believe that every household in the United States that consumes video of some sort will have a streaming service as the gatekeeper.
But, there is yet more to this story.
Because the U.S. is tiny compared to the rest of the world…
While the United States has around 50 million users, that’s tiny compared to the rest of the world:
Strategy Analytics notes that more than 20% of Smart TVs sold today run on the Samsung developed Tizen platform while 10% run on the Google Android TV system.
In 2018, Roku TV captured just 4% of global TV sales but their operating system powers 43% of the world’s streaming-connected TV’s!
That’s an amazing secular runway ahead, and we expect Roku to remain just as aggressive in penetrating international markets as Netflix was 8 years ago – when NFLX stock was under 15 bucks.
In its letter to shareholders, Roku said: – “Around the globe TV viewing will continue to transition to streaming. We are building the foundation to capitalize on the international opportunity – including key hires and projects – to enable us to be successful on a global scale over the long-term.
These are still early days for us on the international front, and thus international distribution is unlikely to be a major driver of 2019 account growth. We expect to start seeing greater benefits of these investments show up in international account growth in 2020 and beyond.”
A Powerful Investment Opportunity
Roku has a dominant hold on TV manufacturers.
Roku has the largest retailer in the world behind it, intentionally competing against Amazon an all fronts.
Roku has introduced a new ad unit that will give attribution true meaning in TV land, and that will become the largest, most sought after ad unit in the TV world, ever.
With better attribution and 29% of eyeball hours on streaming with only 3% of ad dollars — watch that dollar spend turn hard — even parabolic.
While the market may get crazy with political, economic, and trade war news — the growth is coming for Roku. An acceleration of growth, and the spoils of a war won. We don’t care about the stock price in the short-term — that’s just conversation.
It’s the long run we are after and we still don’t think Wall Street understands what’s going on.
The opportunity with Roku is well beyond the next few years– toward a tectonic shift away from traditional TV, where streaming is everything.
A world where content is so rich, that Netflix, Amazon, Google, Disney, Apple and many others will compete for eyeballs, while Roku simply gives them access to the eyeballs.
In addition, we see the first revolutionary change to TV ads since the invention of the TV itself.
An interactive, clickable TV ad — will be mind-blowing for everyone watching.
And, just as we predicted two years ago — Roku is becoming the Facebook of TV.
Now, there are no guarantees Roku will win, but we try to find companies that are ahead of the curve, companies that play a vital role in the guts of major technological themes.
They are doing all the right things – like realizing they’d never be able to muscle out their endlessly deep-pocketed competitors - Google, Amazon, Apple – by just selling hardware boxes and hoping to make a profit.
Despite ROKU shares’ strong performance this year, we think Wall Street still doesn’t completely understand the company.
When we take a look under the hood, we see a robust advertising and platform business that knows the battles in needs to win and how big the rewards are.
CEO Anthony Wood says that in the not-too-distant future ALL television will be streaming television. We think he’s right, and we think they’ll be the #1 gatekeeper in the business.
And we see a company that happily gives up gross margin on hardware, because the real gold mine is simply getting people to stream video and interacting with happy advertisers.
Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%