Darth Roku

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Darth Roku actually does sound like a Sith Lord name, but I am actually replying on separate thread to Darth post here, so it doesn’t get lost in the shuffle:
https://discussion.fool.com/dreamer-have-you-looked-into-roku-as…

It is a detailed and long post, so won’t just repost it all here, but here are some highlights:

"1) #1 by a mile in streaming hours. 43% and increasing of connected TV streaming hours and 22% across all mediums. Amazon was #2 at 18% and holding steady of share.

  1. Most recent data I can find (April 2018), 83% of all US OTT Programmatic Ads were delivered on ROKU platform.

  2. Roku dominates and is pulling away with US device sales. US accounts for 85% of OTT global OTT market. US accounts for 70% of global streaming hours. The international market is very much undeveloped, and to immature to have a leader yet.

  3. CTV ad inventory on ROKU platform “more than doubled”, again. The company says they are in early innings and building out the full market is at least a three year event to truly mature.

  4. Revenue growth has accelerated every quarter for at least the last year from mid 30’s to 59% most recently. The amount the company beats it’s top of line guidance has been accelerating, most recently $25M over managements top line guidance. A $25M beat this next quarter yields further acceleration to 62%.

Q3&4 are seasonally the strongest quarters which gives me high hopes for the rest of the year of upside surprises.

  1. CTV ad delivery averages a 47% failure rate due to technical decencies along the supply chain resulting in missed revenue opportunities. Not sure if ROKU has the same failure rate or not but there is significant room for improvement in revenues without the already more than doubling of inventory. These issues will get solved by the industry sooner rather than later.

  2. Far from the walled Garden image, Roku is an open source developer platform with a several year mature Unified Ad Framework. This framework connects Ad inventory fro ROKU supply and ROKU publishers supply and over 40 DSP including “major players” like The Trade Desk."

-Darth(taco)

Ok…I am not in Roku for a few reasons:

  1. bad timing…everytime I thought about it, I liked something else better, and the price about tripled this year already, and I don’t want to chase a high valuation.
  2. my TTD bromance makes me biased against Roku a bit, as they act like (yet another) walled garden, from what I have read. TTD CEO Green was basically hinting about Roku when they stated their newly announced Amazon Prime Video partnership would likely pressure other “content aggregators” (I think that was his term) to follow suit.
  3. I have trouble understanding their revenue streams, because it isn’t broken out with revenue for each segment, and I completely discount the hardware, so am only looking at ad rev/sub fee cuts/software-O/S revenue. Also - what of this is recurring?
  4. I have Roku on 4 tvs at home…2 devices and 2 tv’s with O/S embedded. My “main” tv is a Sony with their own O/S (I believe google-based) and main reason I got the Roku’s was because they had a beta app for Xfinity Comcast, which allowed me to reduce the # of cable boxes in my home to (1). So I get the Roku and use it almost every night as I am banished to the basement tv so as not to wake the kids or mother of my children.

Bottom-line is that my #1 comment is the main thing. Woulda, coulda, shoulda, and if I had a time machine, I would have invested in Roku earlier this year.

As to my #4 comment, I have reached some admittedly biased and non-scientific conclusions, based on my own usage of Roku; I do not find any value in the Roku Channel…mostly older movies and shows, and I am not a huge re-watcher of things I have seen. I do not pay attention to the branded buttons on the Roku remote…the app is easy to navigate and it takes about 2-3 clicks max to get where I want to go. I do not pay attention to any of the home page ads…probably this is 2 decades of conditioning to avoid banner ads on laptop computers. I have had mostly crappy ad experiences…I tend to get the same ad over and over again…it just doesn’t seem intelligent. I don’t know if that is the fault of Roku, or the app I am using. I tend to use Netflix (no ads), Prime (no ads), Hulu (ads), and YouTube (ads). I already belonged to all those apps except Hulu, and when I got my Roku, I just signed in (so Roku couldn’t have gotten any money from me) to Netflix Prime and Youtube. I just maybe Roku gets a cut of my monthly Hulu? Would they get a cut of my eventual Disney+ membership? What if I just sign up to Disney+ on my Sony tv and later sign in to the app on Roku…pretty sure Roku is out of luck there, right?

So it is really confusing how to correlate the viewing hours and the number of subscribers to revenue. They probably have a per-user/ARPU type of metric, I assume.

Unlike Netflix, which has a formula you can figure by multiplying their sub fees X number of subscribers, I am not sure if this is as clean for Roku or not…I really just don’t know.

Bottom-line, if the stock lost half it’s value or tripled from here, neither would surprise me. Because I can’t get personally convicted in the valuation, I am choosing to stay on the sidelines for now. Doesn’t mean it isn’t a good investment…it just means I am not smart enough to figure out if it is or isn’t, at current valuation.

And given the recent SaaSquake in multiple compression we just witnessed across so many growth stocks, I do not expect to see multiples shoot right back up to levels of 30 P/S multiples being handed out like candy to anything that looks like a cool SaaS or growth company.

So if I back out the hardware…hold on. In looking up the hardware/software split, I see this recent SA article: https://seekingalpha.com/article/4290733-roku-priced-near-pe…

Mentions good things on ARPU:
Looking at ARPU, we can see that it’s growing over 4% sequentially the past five quarters, up from $16.60 in Q2 2018, to $21.06 in the most recent quarter. This figure is up 88% since the company went public a little over two years ago. On active users, the company’s net adds last quarter were roughly in line with the prior trend, at 2.1 million last quarter vs. an average quarterly net add of 2.08 over the past four quarters. This remains impressive as maintaining the same growth is always challenging as scale increases.

Thought on valuation:
Moving over to valuation, we can see that Roku is currently trading at a price to sales ratio of 19.60, and anything above 15 is quite lofty. Comparing this to Netflix (NFLX), the highest price to sales ratio Netflix traded at in the last decade was 13.91 times. Roku’s current price to sales ratio of 19.60 is 42% above Netflix’s peak levels.

The good revenue (not hardware):
Platform revenue of $167.7 million, up 86% YoY
Platform revenue growth of 86% year-over-year increased sequentially from 79% year-over-year last quarter. We expect platform revenue to represent roughly two-thirds of total revenue.
For modeling purposes, you should continue to model full-year platform gross margins in the low 60s as a percentage of revenue.

So if their full year total rev goal is approx $1b, and 2/3rds will be platform, then that is $667m or so in “good” revenue.

Ok…I admit that non-hardware story is better than I thought it was.

$667m would be about the number they announce in Feb 2020, in their Q4 and full year ER…about 5 months away.
For comparison, TTD latest full year forecast, which would end about same time as Roku, is $653m.

TTD is a $9.5b mkt cap, and at $653m they are a forward-looking 14 P/S.
Roku, is a $17b mkt cap, and just on Platform rev of $667 their forward-looking P/S is 25.

TTD we can likely expect will be mid-40s growth next 2 Q’s.
Roku is likely a bit more volatile due to when they recognize revenue, but this past ER hints that the coming ER may show growth in current Q of “only” the 40’s, down from 50’s growth this past Q.

Conclusion: I get streaming and CTV. I like the concept. I struggle with how they get paid and how much of their platform rev is ad rev vs subscription fee cuts, etc…
I also see their platform business (only part I care about long-term) as being equal in size, and potentially equal in growth rate, as TTD, which is currently much smaller in mkt cap. So if the stock came down in price, I would be a buyer…but I fully expect it may never come back to a place where I feel like pulling the trigger.

Dreamer

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Great article.

  1. I guess there are many less affluent families in US watching a lot of free content in ROKU Channel.
  2. Also ROKU’s international expansion looks having a better prospect than Amazon (bundled with Prime) and Apple TV (expensive). Low price hardware and free content are the best combination to rake in users in developing countries
  3. ROKU TV OS is the real edge here. A TV come with a ROKU pre-installed OS is a very powerful edge. When the pool is big enough then it is called ecosystem. App developers will start to develop for ROKU platform.

Price fall to $123 at P/S=15, still a long way to go. I would initiate a small position if it falls to 120ish level.

I like TTD a lot and it is my biggest holding now.

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Thanks for your thoughts Dreamer.

I was a skeptic at first with Roku having only started building out a position in early May, which even so, has had amazing returns so far. While the returns over last year have been remarkable, they were also coming from a point where the market had beaten the stock down to close to IPO level.

I wrote them off as a hardware device company like much of the market apparently. I didn’t understand how they were leveraging their developer ecosystem and user engagement to drive platform revenue growth.

Until a few days ago I understood them to be a “walled garden”. But that is not the case, in fact, quite the opposite. They have been an early adopter of openness to the entire chain of modern digital ad delivery. From the call on Amazon suddenly opening up.

Analyst question

…And then do you think – you’re thinking about how your advertising will change with Fire TV given that they charge publishers 10% for advertising and they have – they said they will open to third party demand, at least the trade desk. So if you could tell me how you are thinking about that and what we should expect? I would really appreciate that. Thank you.

Scott Rosenberg

…With regards to your question about third party demand and activity and I’m not sure I fully filed followed the question in the Fire ecosystem. As you may know Roku for years now has been an open IIB based, standards based ecosystem. We implemented the Roku ad framework years ago, made it available to publishers, as well as to our own media sales team. There are over 40 DSPs that are connected into the Roku ecosystem. We work in our own media sales with many of the biggest DSPs in the ecosystem. We think operating an open ecosystem, a data driven ecosystem is essential to the success of OTT advertising and are highly committed to it and we think that the numbers demonstrate the attractiveness of our offering to advertisers.

Both the publishers, when they sell their inventory and ROKU’s own sales team utilize this Ad Framework and they have over 40 DSPs available. And TTD is one of them, they’ve been buying ads on Roku for years.

From 2 year old interview with Brian Stempeck, TTDs chief client officer.

A DSP is good at aggregating inventory from thousands of sites. We aggregate inventory today from all the major apps and OTT devices. We buy inventory on Roku and Hulu, and Sony Crackle, for example.

Could fill up a whole post on this Ad Framework ecosystem they have built. It’s quite remarkable.

I’ll try to follow up on guidance as I don’t have time right now. In short They have been blowing the lid off of their guidance. They forecast 42% growth at midpoint for Q2 and of course it came in at 59%, for instance.

This developer payout documentation is a good way to get started with how ROKU monetizes platform. As has been discovered from other members of the board, the heavy weights like YouTube and Hulu have some other System with Roku, this is for the everybody elses.

https://developer.roku.com/docs/features/monetization/payout…

Darth

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Darth,
Appreciate the comments, and wish you would stop by my board sometime.

2 things:

  1. any concern on the valuation, given platform rev is equivalent to TTD rev, yet much more expensive?

  2. are we sure TTD and Roku cooperate? I just can’t get anything recent…I know you have that 2-year old mention, but with Roku being absolutely on fire, and CTV being Jeff Green’s favorite topic, and fact that Jeff Green is such a name-dropper, it is odd that I have never heard him bring up Roku on a CC, in terms of working with them.

I lied…I guess this is #3 or #2.5 at least. Here is Green’s comment. If not Roku, who would “other CTV aggregators” even be referring to?

“This agreement is an important indicator of where the industry is going, and will become just one of many, over time,” Green wrote to employees. "APS is supporting the open internet, in contrast to other big tech walled gardens. It’s a bold move which may drive action from other CTV aggregators.”

thanks,
Dreamer

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  1. I just don’t think we should isolate out Roku’s device revenue like it doesn’t exist. It’s a close to $400M/yr business growing about 25%. Licensing revenue from OEM TV manufacturers running the Roku OS falls within platform, so that’s a pure device revenue stream. If we do back it out we have to back a fair value for that business out of Roku’s market cap. It’s not a Square or Nutanix situation, devices are Roku, even if not its best lever for revenue and profit of the business model.

Comparing ROKU Platform Revenue to TTD net revenue may not be appropriate either. Roku ad revenue is all CTV (ok they have some display ads on home screen but it’s not the bulk and could probably still be called CTV). If you can figure out what TTDs CTV revenue is that would be great to compare that. With TTD you also get Display ads, which is TTDs anchor at this point I think.

That’s just how I see it anyways, you do you on how you think it should be done.

2&2.5) I agree it’s murky, all I can do is point to what the guy said and what ROKU said in the call. It took me a long time to find that. Perhaps the TTD guy was referencing ads that were sold via a publisher like Sling that was streaming on a ROKU. But he did say “we buy ads on Roku.”

On one hand Green doesn’t mention selling ads on Roku, on the other he also hasn’t referenced Roku as a “walled garden” to my knowledge. He’s never shied from using that term with Amazon, Google, FB. Google and Facebook is who came to mind with Greens other “big tech” walled gardens comment when I first read it.

We’ve both been big on TTD since near the beginning. Im still big into TTD. Just like ROKU as a purer CTV play. TTDs revenue growth has slowed a little but that could be just temporary and Roku could slow at some point too.

Darth

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Telaria is working with Hulu on programmatic programming.

https://www.adweek.com/programmatic/hulu-names-telaria-progr…

Hulu has passed Amazon on Roku’s platform.

https://www.cordcuttersnews.com/hulu-has-passed-amazon-prime…

Disney controls Hulu now, Will Telaria start working with Disney plus?

https://www.cnn.com/2019/05/14/media/disney-buys-comcast-hul…

Andy

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I asked Telaria a week ago how they viewed Roku and didn’t receive a response. But I asked TTD today how they felt about Roku and here was there response. I am leaving out the name of the person who responded and just showing my question and there response.

Hello, I would like to understand how you see Roku. I know you see Facebook and Google as walled gardens. Do you think of Roku in the same way? If not could you explain how TTD works with Roku.

We view Roku as semi walled. They are not like Google (youtube) and Facebook. We do buy on them, we have a good relationship with them and I think they said in their last call they have 40 something DSPs that can buy on Roku.

My understanding when a DSP buys inventory, Roku provides information on the available impressions and us or other DSPs will compete to fill the available impressions. You would have to ask them but we might be one of the larger DSP buyers on their platform.

They have been doing great! It is awesome to see.

While either one of us cannot guarantee stock market success every quarter we are probably the only two companies in the market today (maybe Telaria can make a case) that are the closest pure plays on the connected TV theme.

We and I believe Roku also believe that eventually all TV will be delivered via an Internet connection and that in the not too distant future, linear TV as we know it will be dead.

Thanks for you inquiry! Hope this helped.

This was really interesting to me and gave me better insight into how Roku is working. Some of this we all have heard on the conference calls, but what is really nice is that TTD investor relations gave me a response. I always have more respect for companies that are willing to respond to their investors, no matter how small.

Andy

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Andy, that is dynamite! Thank you for following up with TTD.

That is an amazing insight into the question straight from the source. And good on TTD IR for being so responsive. Impressed at how well they know the field, including the remarks we just highlighted from ROKU’s conference call and throwing TLRA in there too.

We can confirm that ROKU provides ad impressions to the market, provides some level of data, and TTD may be at least one of the largest DSP buyers of ROKU inventory if not the largest. And TTD believes Roku is doing great and TTD, ROKU, and maybe TLRA are the closest pure plays.

Well done.

Darth

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Thx for that Andy. Very useful info.

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Impressed at how well they know the field, including the remarks we just highlighted from ROKU’s conference call and throwing TLRA in there too.

I agree Darth, I was really surprised they mentioned TLRA. Maybe a little bit of confirmation bias :slight_smile:

Andy

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That is really interesting Andy…thank you for sharing.
I was just thinking today, because of Darth’s push of Roku and this thread, that I would try and hit up TTD IR for their feedback…so you beat me to it!

I guess I just don’t understand why TTD doesn’t seem to ever comment on Roku.
I would like to understand how much they are not getting due to “semi-walled”.

But half a partnership is better than what I thought.
Interesting that a TTD IR person would reply and mention TLRA.

Dreamer

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Interesting that a TTD IR person would reply and mention TLRA.

Agreed Dreamer but one thing that has to make you happy is that the IR person believes that they are one of the biggest DSP on Roku.

Andy

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We can confirm that ROKU provides ad impressions to the market, provides some level of data

Just to expand on that thought:

  1. Roku has a significant amount of proprietary data for advertisers to leverage. By owning the viewing
    platform, Roku is able to collect data across OTT apps.

  2. In June 2018, Roku launched a marketplace that lets publishers use Roku’s first-party audience data. The idea is that allowing publishers to match their own data to Roku’s will help publishers sell their inventory on the platform.

[Not my original thoughts; just information that I collected that I should footnote if I kept track of my references]

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I asked Telaria a week ago how they viewed Roku and didn’t receive a response.

I too would be interested in that response. I asked two questions of their IR department over the past month and never received a reply.

Telaria, as a SSP, is able to provide publishers and content provider clients (i.e. HULU) with their services via their VMP software platform, the ad server, to maximize ad inventory outcomes.

Through the audience network and ad exchange, ROKU has developed and continues to develop their own in-house version of a VMP platform.

Therefore, on some level, Telaria’s services would appear to be somewhat redundant when it comes to a company like ROKU.

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My understanding when a DSP buys inventory, Roku provides information on the available impressions and us or other DSPs will compete to fill the available impressions. You would have to ask them but we might be one of the larger DSP buyers on their platform.

Andy,
Good Q&A with IR. On the above while TTD is able to get some inventory from Roku how does that tie into programmatic? Only Roku knows Andy is watching Discovery using Roku. Do they share that data with TTD or do they just say - “we have so much ad inventory in Discovery, so many people watch Discovery every week but we won’t share who exactly is watching discovery”. The last piece of info is what programmatic is about and TTD’s unique ID etc. gives it an advantage. But without that info TTD can’t leverage it - Is’nt it?

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Hi TexMex,

Only Roku knows Andy is watching Discovery using Roku. Do they share that data with TTD or do they just say - “we have so much ad inventory in Discovery, so many people watch Discovery every week but we won’t share who exactly is watching discovery”. The last piece of info is what programmatic is about and TTD’s unique ID etc. gives it an advantage. But without that info TTD can’t leverage it - Is’nt it?

Ok I am not the expert on this, I am trying to get up to speed on Roku and seeing how TLRA and TTD fit into their ecosystem. This is how I see it.

Roku has leverage against some of the small companies on their system and they have their own channel, so what you stated is correct. At this time TTD doesn’t have a way to look into these channels in any meaningful way. But with Hulu, since TLRA is using TTD’s unique id they can look into that channel. Also hopefully Disney + will come on board. Since Netflix doesn’t use ads they have no way of serving ads to them, but Amazon teamed with TTD so they can look into that also. You see what is happening here? This is a new frontier and right now it is kind of broken up. But TTD has given everyone their unique id in order to get everyone to come together. Roku is working with Adobe to set up their system but that doesn’t make sense to me. Why not have everyone in the same market but we will have to see how this shakes out.

Here is a little information on what Roku is doing.

Adobe customers can now target Roku viewers with over-the-top programmatic ads using their own first-party data, allowing the companies to reduce redundancies in ads.

This is the first time Roku has opened up its own first-party data to be matched with brands through programmatic ad buys, the companies said Tuesday at the Adobe Summit in Las Vegas. The deal is currently exclusive to Adobe, though Roku declined to comment whether it will partner with other companies in the near future.

https://adage.com/article/digital/adobe-roku-brings-precisio…

Now just to keep it real I want to give this article out also. It has some information that seems really good to keep in mind.

TradeDesk has been an anomaly in the ad industry. While regulations chip away at competitors, including the once invincible Facebook and Google, TradeDesk has gained serious traction with a 400% increase in stock price. The triple digit increases occurred after the GDPR regulations on May 25th, which Wall Street believed would strengthen market share for Facebook and Google (the opposite happened, which matched my prediction in numerous Facebook articles). TradeDesk has continued to crush earnings on many accounts with revenue up 56% and earnings per share at $1.09 compared to 54 cents YoY.

and

TradeDesk does not have a moat here, which is important to remember. Third-party ad platforms using anonymized IDs is advertising 101 and easily duplicated, but TradeDesk is the more agile company in the market and moved quickly on the window of opportunity that the GDPR opened up. The Unified ID solution was rolled out in October of 2018 with platforms like Lotame and SpotX pledging to work with the Unified ID solution.

Andy

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Sorry about that I forgot to post the link:

TradeDesk has been an anomaly in the ad industry. While regulations chip away at competitors, including the once invincible Facebook and Google, TradeDesk has gained serious traction with a 400% increase in stock price. The triple digit increases occurred after the GDPR regulations on May 25th, which Wall Street believed would strengthen market share for Facebook and Google (the opposite happened, which matched my prediction in numerous Facebook articles). TradeDesk has continued to crush earnings on many accounts with revenue up 56% and earnings per share at $1.09 compared to 54 cents YoY.

and

TradeDesk does not have a moat here, which is important to remember. Third-party ad platforms using anonymized IDs is advertising 101 and easily duplicated, but TradeDesk is the more agile company in the market and moved quickly on the window of opportunity that the GDPR opened up. The Unified ID solution was rolled out in October of 2018 with platforms like Lotame and SpotX pledging to work with the Unified ID solution.

https://www.fatrader.com/p/analysis/TradeDesk-400-Outlier-Du…

Andy

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Referenced below here with the permission of Beth Kindig to further address the DSP market and minimal moat available. The winners, as we are seeing, are first movers and ease-of-use providers.

“Strong drivers for The Trade Desk include omnichannel capabilities, which is the ability to buy ads across many channels, such as mobile, video, audio, display, social and native. The universal ad ID is another important differentiation as it offers an anonymized ID that helps track users, target audiences and provide attribution. This feature is rare for a third-party ad networks and helps The Trade Desk compete with first-party data companies (Google, Facebook, Amazon, Snapchat, Pinterest, etc.) To further compete with first-party data companies, The Trade Desk buys data. This is combined with the brand advertisers’ data on a data management platform for targeting purposes. Differentiation in this category is essential for investors in The Trade Desk to track closely. Risks are noted below, with the primary risk being the competitive ad ecosystem, which includes many companies that are able to copy ad-tech features as there is very little IP and/or complexities with these products. There is also little loyalty from advertisers who will quickly switch to the next best-performing programmatic DSP.”

by Beth Kindig

(not a commercial for her, but I do think much, not all, of what is discussed in her service is very informational for growth stocks.)

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Thanks. Looks like Adobe can serve programmatic ads through Roku(not TTD at least not yet).
I do not think Amazon shares their ad watching data with TTD either. They just make the ad inventory available to TTD and other DSPs just like Roku does. I recall there was a question in the CC and Jeff Green said we would not see Amazon’s data.
Yes, the walls are coming down slowly which is good for TTD. But as far I can tell if a brand wanted to know exactly how much ads are being watched by the right people they have to work directly with Amzn, Roku advt. staff or looks like Adobe DSP for Roku.