Roku Inc. (ROKU, Financial), the most widely used smart TV operating system in the United States, has yet to turn a profit despite years of strong revenue growth. From $320 million in 2015, the company's revenue has grown exponentially to hit $3.12 billion in 2022. This stellar revenue growth has led to a five-fold increase in the stock price since its market debut in 2017. However, the company is not profitable yet, which is a concern given the magnitude of its revenue growth.
Today, Roku is experimenting with new ways to monetize its user base efficiently. The company is focused on improving its content slate, advertising opportunities, content distribution deals and the development of advanced devices to grow its user base while increasing the chances of monetization. Recent developments suggest it is on the right track to achieving profitability in the long run.
Partnership with Shopify
On July 11, Roku announced a new partnership with Shopify Inc. (SHOP, Financial), which enables its users to directly buy products from Shopify merchants by clicking on advertisements displayed to them. Users must press the OK button on their Roku remote once they see an ad, which takes them to a product page. The entire purchasing process can be completed from the TV itself using Roku Pay. This marks the first time Shopify merchants will have access to TV streaming. As initial partners in this new experience, True Classic, Ergatta and Olly have already signed up to bring shoppable ads to Roku viewers.
This partnership will open new doors for Roku to bring in advertising revenue in the coming years. Video advertising has become one of the go-to forms of advertising in the last few years, and businesses of every size are willing to spend money on video ads. According to data from the Interactive Advertising Bureau, digital video ad spending in the U.S. increased by 21% year over year to $47.1 billion in 2022. Even amid macroeconomic pressures that are limiting the expansion of the global advertising market, spending on video ads is expected to grow another 17% this year to $55.2 billion. In 2020, digital ad spending in the U.S. was at $26.2 billion, highlighting how spendig has almost doubled in two years.
This notable increase comes on the back of the increasing preference for video consumption. According to data from Statista, internet users spent 19 hours weekly watching videos in 2022 in contrast to just 10.5 hours in 2018. This dramatic increase has already triggered notable changes in the way businesses reach their target audiences.
Roku’s partnership with Shopify comes at a time when businesses are trying to bring their products and services in front of viewers. Streaming giant Netflix Inc. (NFLX, Financial) has already reported promising numbers since launching its ad-supported subscription tier a few months ago, indicating that consumers are willing to accept commercials as long as the subscription is offered free of cost or at a cheaper price compared to premium tiers.
As for Roku, it is primarily a connected TV platform that also operates free streaming channels. The vast array of content sources available on the platform makes it ideal for marketers to reach a wide audience effectively at a reasonable cost.
Roku will benefit from the rise of connected TV
The rise of connected TV, or CTV, in the last five years is one of the most noteworthy technological developments as it is likely to kill cable TV in the long run. From 168.1 million viewers in 2018, the number of U.S. connected TV users has risen to 225 million today according to eMarketer, representing almost 70% of the U.S. population. With the cord-cutting movement gathering speed, connected TV platforms such as Roku, Apple TV and Amazon Fire seem well-positioned to register strong growth in total users over the next several years. According to Pixalate data, Roku enjoys a 50% market share in the North American CTV market, which makes it by far the largest CTV platform in this region. As the market leader, Roku is likely to emerge as one of the biggest winners of the growth in the industry.
Advertising will drive growth
Roku generates revenue from a number of sources, including advertising, content distribution deals, licensing revenue, hardware sales and subscription sales. The company is often associated with its hardware products that enable content streaming on TVs, but the biggest growth opportunity lies in advertising. Pressured by the cord-cutting movement, cable TV operators are increasingly finding it difficult to attract advertisers except for live sporting events. Connected TV platforms, on the other hand, have benefited from the demise of cable TV networks. As this trend accelerates in the future, CTV platforms will completely replace cable TV, thereby securing a large piece of the video advertising pie. As the leading CTV platform in the U.S., Roku will get a large share of this incremental growth in industry-wide advertising revenue.
The company has grown exponentially over the last five years as the platform now serves 71.6 million active accounts. This user base is continuing to grow. For example, in the first quarter, Roku added 1.6 million net active accounts compared to the fourth quarter of 2022. This massive, growing user base is likely to attract advertisers, while the growing content slate is likely to attract more users. As Roku grows, the company is likely to benefit from a network effect where its scale attracts more users and advertisers.
Takeaway
Roku’s new partnership with Shopify is just the beginning of a new monetization era for the company. It is well-positioned to capitalize on the changing advertising industry dynamics, and the company will look for more partnerships to boost advertising revenue. The growth of connected TV will boost hardware and subscription sales as well. The cord-cutting movement has brought over-the-top streaming companies into the spotlight in recent years. Although Roku is another key enabler of this trend, Mr. Market has yet to fully reward its progress as a CTV platform with a long runway for growth.
