We are in the midst of a tectonic shift in how people consume media. Everything from television shows to movies to music to live TV. The days of paying an outrageous monthly cable bill for a bundle of TV stations that we never watch are over.
Now all you need is an internet connection and you can stream nearly anything you can imagine. Whether it is your favorite Netflix (NFLX) show or sporting event, the options are endless. I’m talking about an industry that’s expected to grow at a compounded annual growth rate of nearly 18% and reach $83.4 billion by 2022.
As you might expect, this shift is decimating the traditional TV industry. In Q2 2019 alone, cable and satellite companies lost 1.53 million subscribers.
This trend is very real and unstoppable…
Today, people stream 140 million hours of movies and TV shows on Netflix per day. That’s just one platform. The statistics from YouTube are even more staggering. Its users watch 1.3 billion hours of YouTube videos per day.
These numbers will only grow as the next generation of networking, or 5G comes online. You see, 5G will allow users to download and stream movies and tv shows in a matter of seconds. The blistering fast speeds will only exacerbate the adoption of streaming.
Investors are jockeying to find the company that will benefit the most from 5G. But we don’t need to find that little-known networking company that “might” emerge as the winner of 5G, because I found a company that’s already benefiting from its own revolution, and 5G will only provide an added tailwind.
I’m talking about Roku Inc (ROKU), which was among the first to kick off this “cord cutting” movement. It has positioned itself as “the standard” when it comes to a streaming platform.
Netflix, Hulu, Amazon Video, HBO Now, Spotify, Pandora and dozens of other streaming apps integrate seamlessly with Roku’s software. But Roku doesn’t have to spend billions to either create new content or acquire licensing rights to movies and tv shows.
Roku simply provides the software so users can enjoy just about every streaming service. It also sells hardware that comes integrated with its software that can turn just about any television into a streaming machine.
But the future for Roku is clearly its software. In fact, it is so entrenched into the industry that one out of every three smart TVs sold in the United States is embedded with this firm’s software.
That’s huge. And it’s been a boon for the firm’s finances. Its software business alone has swelled from $105 million in 2016 to $417 million in 2018, an astronomical 297% increase.
And it hasn’t sacrificed margins to grow those sales. Gross margins have gone from 30% in 2016 to about 45% last year. To put that into perspective, Wall Street cheers if a company can boost margins by one or two percentage points… This company increased gross margins 15 percentage points.
That’s phenomenal. To top it off this company boasts a solid balance sheet with more than $387 million in the bank and just $121 million in debt.
The company has reported two blowout quarters that’s just now catching investors’ attention. That momentum should carry throughout the year as management said they now have more than 30.5 million active accounts, a 39% jump from the same period a year ago.
One last thing you should know…
I’ve been hearing rumors for a while that Roku is an acquisition target. The company that makes the most sense and has the interest and capital to pull it off is Walmart (WMT).
Walmart is desperate to increase its dot-com portfolio. It jumped into the content streaming space when it acquired Vudu in 2010 — an ad-supported streaming service. Buying Roku would instantly make Walmart a major player in the streaming space and have the side benefit of being able to push Vudu hard to all Roku subscribers.
The two companies are also friendly. Not only is Walmart one of the biggest sellers of Roku devices but they recently announced a partnership to launch new, Walmart-exclusive Roku players and audio product.
The possibility of a Roku acquisition is just the cherry on top. Either way, the industry-wide shift to streaming is accelerating, and Roku is at the forefront of this unstoppable trend.