No one would ever be able to guess the huge profits that 2020 will bring to investors. While the S&P 500 rise of 14% to date by 14% in itself is certainly not bad, it has been a particularly good year for technology investors. The technological Nasdaq Composite is 45% higher.
As so many technology stocks are rising fast this year, many of the best companies in the market are trading at valuations that are hard to justify. So it may come as a surprise to hear that my best stock is a technology stock that has risen more than 160% in the last 12 months.
My top stock for 2021 is none other than Roku (NASDAQ: ROKU) – a streaming TV platform specialist that you already know well, at least from the perspective of a consumer. After all, Roku dominates the smart TV software market in the US, with about 38% of the lucrative and fast-growing space.
If you look at Roku on the surface, you might think the stock is too expensive. Indeed, stocks are currently trading at almost 30 times the sales. It’s about triple Facebook‘s price-to-sales ratio. But a deeper understanding of the fundamental momentum of the business and its enormous market opportunity shows why it is worth paying for.
First and foremost, investors need to realize that Roku’s revenue is skyrocketing. Total revenue increased by 73% in the most recent quarter. Platform revenue, which accounts for 70% of total revenue, has risen 78% year-on-year. With this growth, Roku’s price-to-sell ratio could fall rapidly, thinking the stock will trade 19 times next year.
It is important that Roku’s unusual revenue growth is fueled by powerful catalysts. For example, the company’s active accounts, streaming hours and average revenue per user increased by 43%, 54% and 20% in the third quarter. Some investors may assume that these figures are a major acceleration from pre-pandemic levels, but this is not the case if people are not hiding at home. Fourth quarter 2019’s active accounts, streaming hours and average revenue per user increased by 36%, 60% and 29% respectively. The point is that Roku has carved out a leading position for itself in a fast-growing, resilient tailwind. The rapid growth in revenue is therefore likely to continue. Of course, some delay will play out over time. But any delay is likely to occur very gradually.
A massive market opportunity
But here the growth story of Roku becomes even more convincing. As the provider of the dominant connect TV (CTV) platform, the company can participate in all major CTW market headwinds – whatever they appear to be. With 46 million active accounts, the Roku platform is critical for any publisher looking to reach a mass market audience. Whether programs gain customers through ad-supported or subscriber-based programming, Roku will gain a share of the economy.
The TV advertising market in particular looks like a huge opportunity for Roku. CTV-based advertising spending is expected to be around $ 8 billion this year, while more than $ 50 billion in advertising spending will still go to traditional TV. As sports are finally starting to make their long-awaited shift from traditional TV to follow viewers’ eyeballs and undivided attention to streaming, this expensive content will still need to be funded. It’s simply too expensive to go on without it. What’s more, the sports advertising opportunity is too attractive for marketers not to pursue further – especially in a more purposeful, data-driven environment.
Roku has quietly built one of the most valuable advertising platforms for the next decade: OneView. The TV-focused advertising platform reaches four out of five homes in America. As advertising dollars continue to shift from traditional TV to streaming, Roku is well positioned to take up a large portion of this spending.
A reasonable valuation
Still, some investors may be hesitant about Roku’s valuation. Even a valuation of next year’s sales of 19 times is quite a premium. Furthermore, Roku is still in investment mode. This means that significant gains can be years away.
Nevertheless, I believe that a few simple projections can illustrate why Roku shares deserve the current valuation. Based on the average forecast for analysts for 2021 $ 2.4 billion for 2021, the annual revenue could reach $ 25.5 billion by 2030 if Roku succeeds in taking an annualized growth rate of 30% after 2021. Assuming the tech company has a net profit margin of 20% on sales (about two-thirds of Facebook’s net profit margin of 30% today) and a price-to-earnings ratio of 30, Roku could have a market capitalization of $ 153 billion in 2030, compared to $ 46 billion today.
This projection is undoubtedly oversimplified. It can be completely conservative or even a little aggressive. But given Roku’s huge opportunity to get a share of traditional TV only in the US, and the fact that Roku is just starting internationally, this math that is the best of the napkin is enough to make me apply to this fast-growing technology enterprise. – even at its valuation today.
What are the risks?
As with any individual stock, there is no guarantee that an investment in Roku will succeed. Investors should not only expect wild volatility as it is a growth stock, but it is possible that unforeseen challenges arise or that competition is more formidable than expected. Roku’s competitors are deep-pocket technology giants, including Alphabet, appeal, en Amazon – and they mean business.
But I believe Roku’s position as the independent platform, as well as its early market share leadership, is probably enough to continue to enjoy favor among content publishers, marketers and TV viewers. Roku’s bargaining power with these key stakeholders is likely to continue to improve. Over the long term, therefore, I believe that current investors in Roku shares have a good chance of being well rewarded.