Why Roku (ROKU) Stock is a Compelling Investment Case

Greenhaven Road Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. Greenhaven’s estimated returns for the third quarter totaled approximately +50% net of fees and expenses. August was the best month in the partnership history. The net result is that both funds are up around 55% for the year, comparing favorably to the Russell 2000, which ended September down -8.7% year to date. You should check out Greenhaven Road Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Greenhaven Road Capital highlighted a few stocks and Roku Inc (NASDAQ:ROKU) is one of them. Roku Inc (NASDAQ:ROKU) manufactures a variety of digital media players for video streaming. Year-to-date, Roku Inc (NASDAQ:ROKU) stock gained 59.5% and on November 3rd it had a closing price of $203.49. Here is what Greenhaven Road Capital said:

“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.”

In Q2 2020, the number of bullish hedge fund positions on Roku Inc (NASDAQ:ROKU) stock increased by about 17% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Roku’s growth potential. Our calculations showed that Roku Inc (NASDAQ:ROKU) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.