$ROKU still has a bright future
After reporting earnings and seeing the stock tank 25%, I still think that investors shouldn't dismiss the company and say that it's "game over". The company makes the majority of its revenues from TV advertising.

One thing that $ROKU investors should look forward to is the revenues that will come from a $NFLX subscription tier that's supported by ads. Every time a Netflix user with that subscription tier sees an ad, Roku takes a commission from it. Netflix still has the largest number of subscribers and if more people choose to switch to the ad-supported tier, then Roku would see a huge increase in its revenues.

When looking at their shareholder letter, I don't see doom and gloom.


  • Revenue up 18% YoY
  • More active accounts
  • ARPU up 21% YoY, which means that each user provide more revenue despite watching slightly less content
  • Clients are buying more advertising and haven't used it yet

With the number of active accounts growing 14% YoY, Roku will have more opportunities to reap advertising dollars. And despite the growth in active accounts, ARPU continues to grow more aggressively at 21% YoY, showing that advertisers are spending more on the platform and are competing more for ad space.


Importantly, $ROKU has noted in their earnings report that "[i]__n Q2, the Roku operating system (OS) remained the No. 1 selling smart TV OS in the U.S. The Roku OS was the
No. 2 selling smart TV OS (and the No. 1 licensed smart TV OS) in Mexico, where nearly 1 in 4 smart TVs sold was a Roku TV model." Despite the difficulties of the industry, Roku continues to maintain a dominant position in the TV operating system.

Some will find articles like this and say that $ROKU is dead due to fierce competition. However, I found that Roku reaches 1 in three households in the US. They still hold the majority of the market share in the connected tv market.

CNBC had the chart that showed that both Roku and Amazon have the same amount of market share in 2021. Considering that Roku is a pure play in this industry, Roku has the advantage of being more focused.


Also, there's still more room for growth for all the players in the industry as the number of people in the US who have legacy pay-TV services has a lot more room to decline. Roku is still in a growing industry.


Furthermore, Roku has a new and exciting advertising product coming called "shoppable ads." $WMT is Roku's first shoppable ads client. This is exciting because Roku is opening itself up to more opportunities to sell ads and make more commissions. Retailers have a massive oversupply issue and are desperate to sell their excess inventory. I believe that more retailers are willing to work with Roku in hopes that the shoppable ads will become a success and that they can offload their excess inventory. In the process, people will find shopping for things on streaming platforms as easy as shopping for things on social media platforms.

As for the Roku Channel, it was still one of the top five channels of its platform during the quarter. With content ranging from NBCUniversal Local to Quibi and other Roku Originals, it's no surprise that many Roku users watch content on the Roku Channel. From an investor's perspective, this is a good sign because it shows that all the content spending they're doing is going into fruitful purposes. Hopefully, the ad revenues from it are a lot higher than the cost of content.

Conclusion

Currently, Roku hasn't released their 10-Q and because of this, I don't know how their free cash flow situation is looking. Until it gets released, I will be adding Roku to my watch list and I will consider buying the dip on the business. Long-term investors should also consider adding $ROKU to their watchlist as this business is still high quality and it has many more things to look forward to.
Pat Connolly's avatar
To forecast the effect of Netflix advertising is it possible to use Hulu ads as an example?

Do they call out anywhere how they are able to collect on these ads?
Dissecting the Markets's avatar
@pat_connolly that's a good question. I know that they are able to reap commissions on any ads being presented whenever someone sees an ad while using Roku. Not sure how exactly they track that stuff.
So, this sucks.'s avatar
Great post. ✊
Steve Matt's avatar
I don't have anything intelligent about the business to add as I literally just started my DD on Roku today as I'm interested. However, I can add that cash flows are on their 8-K. It was not great in Q2. They had been +87MM in Q1 and now they're (62MM) YTD so Q2 was ($149,190,000). On a TTM vs. previous TTM basis, it's (4,978,000) vs. +181,685,000
Dissecting the Markets's avatar
@interrobangbros ouch! Are they spending a lot on supply chain issues regarding their hardware sets?
Joshua Simka's avatar
I never saw this as a hardware play and I appreciate your calling out that this is an advertising business. I am concerned about lack of international expansion because in my mind that's a big piece of their growth. Thanks for the recap @dissectmarkets! Long $ROKU.
Dissecting the Markets's avatar
@tomato it seems like they are slowly ramping up international expansion. Some say that internationally, there's too much competition. Others say that the supply chain issues are making it difficult for Roku to have enough boxes to give to European customers to get them hooked onto the platform.
Jeff Sanders's avatar
Thoughts on $TTD as it relates to $ROKU? I think they may experience similar headwinds however, their business model different which leads me to believe they won’t report as much of a slowdown as the market anticipates.

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