4. Roku, Inc. (NASDAQ:ROKU)
ROKU ranks 4th in our list of the best stocks to buy and hold for 5 years. Wood had nearly $750 million invested in ROKU shares at the end of September. ROKU is a popular technology stock among hedge funds. There were 59 hedge funds with bullish ROKU bets at the end of September. Greenhaven Road Capital talked about ROKU in detail recently:
“ROKU (ROKU) – Roku is a position that has appreciated into the top 5, after starting as part of a basket of stocks in March. The share price has more than doubled since our purchases. Roku controls the home screen for tens of millions of televisions. In the same way that Digital Turbine monetizes the limited real estate of the cell phone, Roku monetizes the home screen of smart televisions. Roku has accomplished this by providing a purpose-built operating system to television manufacturers. Roku is built into 1 in 3 of the televisions sold in the United States and increasingly in Canada, England, Mexico, and Brazil. Because the operating system is purpose built for television, it is less resource demanding than alternatives such as Android. This allows for cheaper manufacturing and a cost advantage in the very margin-constrained television market. The net result is Roku adds users for less than $20 and does not tie up any capital in the manufacturing process.
Roku’s platform sits between the 43M active users and content, making money when used. They have an ad-supported Roku channel, earn revenue share on subscriptions to streaming services like Showtime, and get a slice of advertising inventory from traditional channels, such as Fox Sports, when streamed via their Roku platform.
Roku has consistently increased revenue per user, and last quarter was up to $24 (over a trailing 12 months). The increase in revenue per user has been a function of increased engagement and rising advertising rates. Last year, Roku purchased Dataxu, a company that helps clients enhance marketing and advertising efforts with data science, to make it easier for large advertisers to place ads. In my opinion, the growth of the user base is highly likely, as there will be a continuous upgrade to larger, better, and less expensive televisions. Roku benefits from cord cutting. There is currently a very large gap between the Roku operating system and the Samsung and Sony systems – it reminds me of the period when Nokia and Microsoft were hanging on to their mobile operating systems. With a growing user base, Roku has increasing negotiating power with content providers. Since the quarter ended, Comcast decided to put their Peacock streaming offering on Roku after resisting initially – just another sign of the increasing power of Roku. We have the opportunity for substantially growing the user base and revenue per user while consuming very little capital.”
