On June 16, Roku(NASDAQ: ROKU) announced a partnership with Amazon(NASDAQ: AMZN) that will allow advertisers access to the streaming specialist’s ecosystem through Amazon’s advertising platform. This agreement represents a significant move forward for Roku. Although the stock has encountered some headwinds over the past year, this new development once again highlights why Roku stock is worth investing in for those focused on the long game. Let’s dig deeper into this partnership between Roku and Amazon — as well as the rest of the former’s business — to understand why.
Amazon is a notable player in the connected TV (CTV) market. However, Roku continues to reign supreme — it holds a leading market share in the U.S. Amazon’s size advantage has not allowed it to take over the top spot, and it’s now partnering with its longtime rival. Amazon and Roku will combine their respective audiences, comprising 80 million households and more than 80% of CTV accounts in the U.S., and grant advertisers exclusive access to this large ecosystem through Amazon’s demand-side ad platform. This is a win for Roku too. Here’s why.
Image source: Getty Images.
One significant long-term opportunity for the company is the continued switch from cable to streaming for viewers and advertisers. However, a highly fragmented CTV landscape presented advertisers with several challenges, including difficulties in reaching targeted audiences across various platforms and effectively managing ad frequency. Roku noted in a recent press release:
Early tests of this integration have shown significant results. Advertisers using this new solution reached 40% more unique viewers with the same budget and reduced how often the same person saw an ad by nearly 30%, enabling advertisers to benefit from three times more value from their ad spend.
In other words, advertisers should get greater returns from the same amount of spending. The deal helps address some pain points they had and helps sell even more companies on the benefits of pouring ad dollars into the kind of platform that Roku offers.
It’s worth highlighting again that this deal is valuable to every party involved, largely because of Roku’s leading CTV ecosystem. It also points to the strength of its network effect. Since the value of Roku’s platform only increases as its audience numbers grow, partnerships of this kind could become more common.
Roku has encountered some issues in recent years. Its average revenue per user (ARPU) has stalled, while it remains unprofitable. Though the company no longer reports the ARPU metric, management previously attributed poor ARPU growth to the company’s expansion efforts in markets outside the U.S., where it is focusing on scale first, rather than monetization. That’s the same blueprint it followed in its more mature markets when it sometimes sold its namesake devices at a loss to onboard enough households within its ecosystem.
Investors have seen the results of this strategy in the U.S., where Roku already holds a leading market share. This should give investors confidence that it can achieve similar results in other regions. What about the persistent red ink on the bottom line? Investors vastly prefer profitable companies, especially in this uncertain economic and geopolitical environment.
But Roku is making strides in this department too. In the company’s first quarter, revenue came in at $1.03 billion, up 16% year over year. The company’s net loss per share was $0.19, an improvement from the $0.35 per share loss it reported in the prior-year quarter. Roku might not be consistently profitable, but the company is growing its top line at a good clip and making progress on the bottom line. And overall, the company is still in a great position to cash in on the massive long-term shift from cable to streaming. And here’s one more thing that makes the stock attractive.
Roku’s forward price-to-sales ratio is 2.6 as of this writing. In a stock market at all-time highs and valuations reaching unsustainable levels, Roku’s modest valuation is especially rare for a growth stock in a leading industry position. For this and all the other reasons, it’s worth purchasing the company’s shares.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Roku. The Motley Fool has a disclosure policy.
