Key points

Roku's revenue grew 80 per cent in the first half of 2021 as advertisers followed audiences to streaming platforms.

Investors should track the company's growing content and advertising capabilities.

The expected size of the online TV advertising market is $24 billion, meaning Roku is likely to grow into a bigger business.

Roku shares have fluctuated this year. After surging 148% in 2020, it lagged behind the s & p 500 this year. Valuation concerns seem to have a bigger impact on stocks than anything else because the company has done well this year.

Revenue grew 79% in the first quarter and then accelerated slightly to 81% in the second quarter. Specifically, growth in average household income (ARPU), a key monetization indicator, has begun, accelerating from 20 per cent in the third quarter of 2020 to 46 per cent in the most recent period.

These impressive figures show that advertisers are starting to pay attention to the audience of the streaming platform, and Wall Street analysts are very optimistic about the company's prospects. The average target price of the stock is currently $502 per share, up about 40 per cent from the current offer.

That's why Roku is well positioned to keep advertising revenue growing on its platform, which may be the catalyst for pushing stocks towards those lofty price goals.

Roku

Roku has taken some key steps over the past few years, the first being the acquisition of Dataxu at the end of 2019, a demand-side platform (DSP) that allows marketers to plan and buy video advertising campaigns. In the second quarter of 2020, Roku integrated Dataxu's assets to form the OneView advertising platform, which provides advertisers with materials and tools to manage their ads on OTT services, desktops and mobile devices.

Since Roku founded OneView, ARPU growth has accelerated every quarter, especially when smaller advertisers began to invest in digital streaming platforms for the first time, which contributed to Roku's recent growth.

While there will be a more difficult year-on-year comparison in the second half of 2021, it is clear that advertisers are starting to find real value in the company's content distribution, especially through Roku, which is growing faster than the rest of the platform.

Earlier this year, Roku acquired the global streaming rights to the content from the now disbanded Quibi. In March, it also acquired ThisOldHouse, a popular family renovation plan. This led to an all-time high in the number of separate accounts watching Roku in the second quarter and more than doubled the number of streaming hours compared with the same period a year earlier.

This is a combination of advertising capabilities, especially in providing marketers with high returns on advertising spending, coupled with compelling content provided through the Roku channel, allowing the company to grow even more. The latest round of ads bought from advertisers suggests that this part of Roku's business is likely to explode in the coming years.

Online TV commercials are a huge opportunity

During the second-quarter earnings call, management reported that it had completed deals with all seven major agent holding companies, the so-called pre-season, where advertisers had the opportunity to sign deals at discounted prices before the new content release season.

Roku said it had completed these deals earlier than in the past and that its spending commitments had doubled compared with the same period last year. This "shows that streaming has become a first-class citizen for brands considering allocating annual budgets," said Scott Rosenberg, senior vice president of Roku. "

According to eMarketer, online TV advertising spending is expected to grow from $6.4 billion in 2019 to $24.8 billion in 2024. By contrast, Roku's platform revenue over the past four quarters was small, at $1.7 billion.

The stars are lining up. Management said that more than 42 per cent of advertisers who bought ad time on the Roku platform were pre-purchased for the first time, reflecting that the tsunami-like shift of advertising to digital platforms was accelerating. In view of the recent sharp decline in TV ratings among 18-to 49-year-olds, these advertisers urgently need to follow their viewers to use digital services.

The advertisement is still catching up.

Despite the growth of the streaming media market, advertising still lags far behind the transformation of audiences, who are increasingly turning to digital services. Considering that 39% of TV viewers between the ages of 18 and 49 have turned to streaming, the proportion of advertising budgets that have turned to digital platforms is much lower.

Roku's investment cases are all about the expectation that it will absorb ads that will inevitably move to digital platforms. Roku's latest earnings report shows that the shift is well under way. Given the strong tailwind behind the Roku business, analysts may be right, which is likely to become a $500 streaming stock within a few years.