Written by: Aditya Raghunath
Growth stocks have been popular over the last few decades for a reason. They have created significant investor wealth and crushed market returns. Stocks such as Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Apple (NASDAQ: AAPL) have generated exponential returns for long-term investors.
For example, if you invested $1,000 in Amazon stock 10 years back your capital would have ballooned to almost $21,000. This figure for Apple and Netflix stands at $9,053 and $24,900 respectively. Comparatively, a $1,000 investment in the Dow Jones and the S&P 500 would have grown to $2,500 and $2,800 respectively.
Growth companies tend to increase profits and earnings at a faster rate than the average business in that particular industry. They are attractive as these stocks trade at a premium valuation. One such company that should be on the radar of growth investors is Roku (NASDAQ: ROKU).
Roku went public back in September 2017 at a price of $14 per share. The stock is currently trading at $117 which means it has already returned over 700% in less than three years. So, why am I bullish on this stock?
Roku will benefit from the shift to streaming
The way people are consuming entertainment content is changing. The cord-cutting phenomenon has gained pace in the last decade that has led to the introduction of several streaming services including Netflix, Amazon Prime, Disney+, and many others.
Roku is a company that is well poised to benefit from this trend. It is the leading streaming device platform in the United States by the number of hours streamed. It ended 2019 with 36.9 million active accounts and this figure rose to 39.8 million at the end of the first quarter of 2020. The number of streaming hours rose 49% year-over-year to 13.2 billion in the March quarter, up from 8.9 billion in the first quarter of 2019.
Roku has a three-pronged strategy to expand revenue over the next decade. It aims to increase the number of active accounts that use its streaming platform to watch TV. It is focused on increasing user engagement and grow the hours of content streamed. Roku also wants to drive sales and expand gross profit by monetizing user activity on its platform.
Roku sells stand-alone streaming players to increase its active account base. It has partnered with smart TV manufacturers to license the Roku OS. This TV licensing program has experienced strong growth and approximately a third of the smart TVs sold in the United States was a Roku TV.
To keep users engaged and retain active accounts, Roku invests significant resources to improve the user experience on its streaming platform. This includes improvements to navigation functions as well as search and discovery features.
But the Roku player is not the company’s primary business segment. Roku’s Player revenue was up 22% in Q1 at $88.2 million and accounted for 27.5% of total sales. The company generates a majority of sales from its Platform sales that accounted for 72.5% of revenue in Q1.
Here, Roku's Platform business generates revenue by monetizing user engagement on its platform through a variety of services including video ads in ad-supported channels, sales of subscription services as well as brand sponsorship and billing services.
Roku stock has tremendous upside potential
Roku believes streaming services to completely take over viewership in the upcoming decade. It is part of a rapidly expanding market and still generates a majority of sales from the United States. It is now targeting international expansion which will be a major tailwind for its stock price.
Roku stock is still trading 33% below its record highs and is one stock that can generate massive wealth over the long-term.
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