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Quick Summary

Roku is a streaming video device and platform company. The company provides a television-based operating system (OS) that allows consumers to stream a variety of services (Netflix, Hulu, Disney+, HBO Max, and many more). This OS is either built directly into televisions ("smart TVs"), or can be added to a TV through devices such as Roku's "Streaming Stick", "Roku Express", or "Roku Ultra" set-top boxes. About 70% of its revenue (and virtually all profits) comes from what the company calls platform sales. The biggest portion of these are through selling advertising on its own channels or through channels the company has access to inventory on. Roku also generates platform sales from selling channel subscriptions. For example, the firm takes 15-20% of Netflix subscriber fees when a customer signs up through Roku. Finally, Roku earns about 27% of sales through selling its hardware devices. The company has over 51 million subscribers (the vast majority in the U.S.) and streamed almost 59 billion hours of content in 2020.

Does The Company Have Rising and Recurring Revenues?

YES. Revenues have been rapidly growing at about 50% year-over-year rates, as customers increasingly migrate to video-on-demand for their entertainment needs. Users are growing rapidly as well, increasing from 19 million in 2017 to over 51 million in 2020, a 39% compound growth rate. This is the early-to-mid stages of a mega-trend, and the addressable video ad market is enormous (over $150 billion in the U.S. alone). International growth will be a big focus in the future, as Roku has already penetrated 40% of U.S. households (more than twice what any cable company has achieved). As for recurring revenue, obviously, player hardware revenue is not recurring. Platform revenue, on the other hand, is basically an advertising model that should be reliably recurring for Roku. As this is where the bulk of sales and practically all cash flows originate from, we feel this gives the company a reasonably attractive revenue model.

Does The Company Have Durable Competitive Advantages?

NO. Roku is the leader in the streaming OS market, with about 35% market share in hours streamed and 30% market share in connected TVs, nearly triple its closest competitor. However, this is a very competitive space. Both Roku's devices and platform face substantial direct competition from tech heavyweights including Apple (AppleTV and tvOS), Google (ChromeCast), Amazon (FireTV), Microsoft (Xbox), Sony (PlayStation), major cable operators (Xfinity and Cablevision), and even TV manufacturers (Samsung, VIZIO, LG). All of these offer the same basic functionalities, and there is little preventing consumers from migrating to a competing streaming platform if Roku fails to offer the channels or features they want. Roku also relies on smart TV makers to include its OS in their products, and several TV makers have started to offer other Android-based OS options or even built their own OS to cut Roku out and earn their own platform sales. Roku may have to start sharing platform revenue to keep its spot in these products.

GreenDot Rating: 

We feel that Roku's business model deserves a YELLOW (somewhat attractive) rating. The attractive parts are the growth potential and reasonably recurring advertising revenue model, particularly given that it plays into the massive secular trend of on-demand video. The unattractive parts are intense and strong competition, no real durable moat characteristics, and reliance on partners to build ad inventory and also to bundle its OS in their products. It's a fragile business model, but so far Roku has been succeeding spectacularly and could solidify itself as the winner in this lucrative market going forward.