Roku and the Cord-Cutting Revolution

05/07/2019 5:00 am EST

Focus: CONSUMER

Todd Shaver

Founder and Editor-in-Chief, BullMarket.com

Roku (ROKU) is all about filtering out market noise to focus on the long-term glory we see ahead; after all, this company is the bulwark of the ongoing “cord-cutting” revolution, asserts Todd Shaver, technology specialist and editor of BullMarket Report.

You can see that disruption playing out in Roku’s extraordinary expansion. Revenue hit $740 million last year, up 45% and we target only a slight slowdown this year in terms of percentage growth.

As far as actual dollars flowing into the Roku platform go, however, there’s no slowdown here at all. Last year the company increased its sales $230 million. We expect to see that pool of additional revenue coming in expand another $46 million this year.

That’s important because Roku isn’t the kind of business where winning a sale starts the cycle of prospecting for the next one from zero. Once people buy the company’s device or TV makers incorporate its technology into their screens, revenue doesn’t stop accruing.

Licensing fees, carriage fees and advertisements turn every device into a captive cash machine that keeps operating as long as the screen is tuned to any Streaming Video channel, whether that’s Netflix, Hulu or even YouTube.

In other words, Roku isn’t competing with the channel operators. Instead, the company is a next-generation Cable Service, bringing all the channels to your living room screen and deciding which ones get the best placement. If any Streaming provider succeeds, Roku succeeds along with it. The ones who fail don’t matter.

Roku entered the new year with 27 million users and squeezed an average of $6 a month from each. That’s where the real money is. We’re looking for evidence that revenue expanded another 40% from last year’s levels when we see the next earnings report.

At that scale, the company will be on the brink of sustainable profitability. We already know that the existing business model can generate positive cash flow in a great quarter. Now all we really need to see is proof that an “average” quarter can reach the same level.

We haven’t even touched on the real disruptive force that the Roku experience represents. Once households get the ability to create their own menu of shows from all the options available, the days of the legacy Cable TV monthly bill will be numbered. If you like golf, subscribe to the Golf Channel directly. Otherwise, save your money for channels you actually watch.

For decades, "Big Cable" padded its income by providing hundreds of specialty channels to mass markets and made us pay for the privilege. Breaking that “bundle” will change the way we all watch television. One way or another, that’s the story that ends with Roku playing with today’s Technology giants, either as an independent player or an acquisition.

After the 4Q18 Technology rout pushed the stock from $76 to a lowly $27, reality has now reasserted itself and the stock has more than doubled since Christmas. There’s still a lot of room to go before we revisit last year’s peak of $77 — much less our $83 target. We’re loving the ride.

Subscribe to Todd Shaver's Bull Market Report here…

Related Articles on CONSUMER