3. Roku, Inc. (NASDAQ: ROKU)
Number of Hedge Fund Holders: 61
The TV streaming platform Roku, Inc. (NASDAQ: ROKU) is a member of Wood’s stock portfolio since the second quarter of 2019. The firm held 4.7 million shares of Roku at the end of the second quarter. It is the third-largest stock holding Wood’s 13F portfolio.
LRT Capital Management, an investment management firm, discussed a few companies including Roku in its second-quarter 2021 investor letter. Here is a part of what LRT Capital Management stated:
“Roku is the leading TV streaming platform in the U.S and globally. The company’s mission is to be the leading company that connects the entire TV ecosystem of viewers, content publishers, and advertisers. Roku’s business model has two parts: selling streaming devices (Player Segment), and selling streaming content such as subscriptions, ads, and video-on demand services (Platform Segment). The Player segment operates with low margins and acts as a gateway to get users hooked on streaming content. The content in turn generates very high margins for Roku, which makes the company’s business model analogous to the razor-razorblades models of success of companies in the past. The Roku platform allows users to personalize their content selection with cable television replacement offerings and other streaming services that suit their budget and needs. The company is focused on improving its scale, engagement, and monetization. First, scale is based upon the number of active accounts. Second, improving engagement grows the number of hours watched for the company. Lastly, monetizing user activity by content subscriptions or advertising drives revenue growth.
Historically, investors viewed Roku as a provider of commoditized hardware. However, we see the business as a provider of a platform for streaming services with ongoing recurring revenues as the company reduces its reliance on hardware sales for profits. In fact, over the past 5 years, the share of revenue coming from hardware sales has shrunk to just 45%, while its contribution to gross profit declined to 19%.1 We believe that the company’s strong competitive advantage is rooted in its high switching cost and scale-based cost advantages. In addition, we believe Roku is only in the beginning stages of its growth both domestically in the United States and internationally where the cord-cutting phenomenon is at least five years behind the U.S. Lastly, Roku’s capital allocation strategy has been exemplary and focused primarily on acquisitions that improve the customer experience and value of its platform. The moat, growth opportunities, and the company’s track record of capital allocation makes us believe that Roku can deliver strong investment returns to shareholders in the upcoming years…” (Click here to see the full text)
