JDP Capital Management, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio return of 7.26% was recorded by the fund for the second half of 2021, underperforming its S&P 500 benchmark that delivered a 15.25% return for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of JDP Capital Management, the fund mentioned Roku, Inc. (NASDAQ: ROKU), and discussed its stance on the firm. Roku, Inc. is a Los Gatos, California-based video streaming provider, that currently has a $52.9 billion market capitalization. ROKU delivered a 20.47% return since the beginning of the year, extending its 12-month revenues to 165.84%. The stock closed at $399.99 per share on July 16, 2021.
Here is what JDP Capital Management has to say about Roku, Inc. in its Q2 2021 investor letter:
“Roku gained 39% in the first half of 2021 or more than double the S&P 500. Since 2015, Roku’s platform revenue or revenue from subscription fees and advertising has grown by 32×9.
Despite a 300% gain on our investment so far, Roku’s flywheel is just starting to take shape and we are excited to hold the stock.
Roku Q1 2021 Shareholder Letter: “According to e-Marketer, Americans on an average day will spend more time on TV streaming than all major social media platforms combined: 3x Facebook, 2x YouTube, and roughly 2.5x Instagram, TikTok, and Snapchat combined. And, like these major social platforms, Roku possesses deep, direct relationships with consumers that do not depend on third party identifiers and cookies.”
In the last year platform revenue has doubled, and hours streamed per user is up 38%. With subscriber revenue of only $2.67 per month across 53.6 million users (Q1 2021) we think there is a substantial monetization gap to be filled as TV ad budgets catch up with the consumer transition from cable TV to streaming.
Our base case is that average revenue per user (ARPU) in North America will continue growing much faster than new subscribers as Roku harvests the economics of its free ad-supported TV model.
Longer term we think the combination of Roku’s growing value proposition for the consumer, continued acquisition of ad-accepted TV content, and advancements in advertising technology, will lead to higher ARPU and returns on capital than what is possible in paid-subscription TV models.
Roku was founded in 2008 during the financial crisis and its player-hardware lit the spark that later catapulted streaming TV from a controversial niche that few believed in, to mass market adoption. Hardware is Roku’s “customer acquisition cost” or how it onboards subscribers, publishers and advertisers to the platform.
For years the investment community misunderstood Roku as a hardware business and discounted the idea that the market for free ad-supported streaming TV could be larger than paid subscription models after cord-cutting.
Roku Q1 2021 Shareholder Letter: “More broadly, the overall secular shift to streaming continues, and Roku benefits as a result of our leading technology and scale.” “In Q1, total TV streaming ad impressions delivered through OneView nearly tripled year-overyear, while total impressions on the Roku platform (sold by Roku or its publishers) more than tripled.”
Cable TV’s transition to streaming has re-written old industry models and Roku is now an important centerpiece in the battle for the future economics of your living room.
In the first quarter of 2021, Roku reported 18.3 billion hours streamed on its platform, an average of 6.1 billion hours per month. There are more than 25,000 apps on the Roku platform and consumers need an easy way to organize, search and discover content.
Like Spotify, Roku’s position as aggregator becomes more valuable as streaming content explodes and advertisers compete for a limited number of eyeballs for shows, movies and games.
Roku Q1 2021 Shareholder Letter: “With so much outstanding content being made available on the Roku platform, publishers are investing heavily in promotion and leveraging our industry-leading, performance-driven marketing tools to build their TV streaming audiences…
…As a result, media and entertainment advertising (which includes what we’ve traditionally called our audience development business, grew faster than the overall platform in Q1 2021. As the No. 1 TV streaming platform in the U.S. (based on hours streamed – April 2021 Hypothesis Group), Roku will continue to benefit from the ongoing secular shift of both consumers and content providers to streaming.”
Roku’s relentless drive to re-imagine a superior consumer experience in free ad-supported TV has resulted in strong brand loyalty, high quality smart TVs able to be sold for record low prices, and strong ROIs for its advertising and publishing partners.
Roku Q1 2021 Shareholder Letter: “Advertisers continued to follow audience and move budgets into TV streaming, with Roku’s monetized video ad impressions more than doubling year-over-year…
…Our ad technology enables advertisers to precisely reach any subset of our large and growing audience, which in turn improves the ROI of every dollar a brand spends with us. For example, Home Chef’s recent campaign demonstrated that Roku drove a 2.4x return on its ad spend.”
THE ROKU CHANNEL FLYWHEEL
The Roku Channel might be the most under-appreciated asset in the business and is driving the next phase of Roku’s flywheel.
The Roku Channel is a free, ad-supported content app started in 2017 and can be watched on any mobile device such as a phone, tablet or connected TV. The Channel is being built to become the go-to app for content once watched on cable TV and fills the gap between high profile movies and shows on subscription-based apps like Netflix, Disney, HBO, Discovery Channel, etc.
One of the important strategic steps in Roku’s history was to leverage its position with large content owners and offer better terms on the Roku platform in exchange for exclusive access to select content to be used on Roku’s own streaming channel – the Roku Channel.
As an example, Peacock might license a few older shows to The Roku Channel in exchange for rights to sell a higher percentage of the ad inventory on its own app when watched on the Roku platform.
Roku controls 100% of the ad inventory inside the Roku Channel which allows the flexibility to follow audiences in a more granular way that is not always possible inside third-party apps on the Roku platform.
In the ad-supported model, revenue per user is tied to content consumption. The more its users watch the channel the more money Roku can earn from advertising.
The Channel is driving consumption by acquiring traditional TV content not sought after by Netflix, Amazon or Apple. The Channel’s first content deal was the acquisition of Quibi’s assets and has since gone on to acquire reality shows and niche comedies created for selling advertising.
The Roku Channel’s content strategy also drives an important advantage over less developed operating systems offered by TV manufacturers. Lastly, the Channel also helps Roku diversify its revenue away from commissions earned from the large super apps on the Roku platform like Netflix and Disney.
Roku Q1 2021 Shareholder Letter: “On The Roku Channel, we drove another quarter of record growth, reaching U.S. households with an estimated 70 million people. Account reach and streaming hours more than doubled year-over-year – a growth rate that is over twice as fast as the overall Roku platform…
…This demonstrates the power of The Roku Channel flywheel: easy access to content with broad appeal attracts viewers, that viewer engagement attracts advertisers, and advertiser spend in turn allows us to invest in more content…
…This flywheel is enabling us to be more creative and expansive in sourcing content suited to an AVOD (advertising video on demand) business model, and we expect that our content investment will continue to be commensurate with the scale and growth trajectory of the The Roku Channel.”
“In Q1, over 85% of the adult 18-49 audience reach delivered on The Roku Channel was unduplicated with traditional TV. With our market-leading scale and highly effective monetization capabilities, The Roku Channel is also an increasingly attractive place for content owners to reach streaming audiences through both ad-support and subscription models.”
We are excited about what Andy Wood and his team at Roku are building and think it is likely that the market for free ad-supported streaming TV will grow faster than subscription models.
People love free content when advertising is relevant to them, and the ad load is not excessive. The free ad-supported model also translates well around the world and allows Roku to eventually scale quickly in higher growth countries like any internet business.
In May, Seth and I interviewed Tal Chalozin, co-founder of Innovid Inc. about the improving technological infrastructure reshaping what is possible in ad-supported streaming TV.”
Based on our calculations, Roku, Inc. (NASDAQ: ROKU) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Roku, Inc. was in 63 hedge fund portfolios at the end of the first quarter of 2021, compared to 60 funds in the fourth quarter of 2020. ROKU delivered a 10.75% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.