My Favorite Streaming Stock for 2022
Putting money to work in stocks that benefit from broad, secular trends can be a lucrative strategy. Whether it's digital payments, cloud computing, or e-commerce, when the entire industry has a strong tailwind behind it, individual businesses in these sectors stand to do well.
Another area to possibly invest in is the burgeoning streaming-entertainment industry. There are a number of stocks to consider, but I have my eyes set on only one right now as we approach the new year.
Here's why Roku (NASDAQ: ROKU) is my favorite streaming stock for 2022.
Image source: Getty Images.
A rising tide lifts all boats
Netflix (NASDAQ: NFLX) undoubtedly pioneered streaming entertainment, bringing top-quality content directly to viewers over the internet. With a current market capitalization approaching $270 billion and a membership count of 214 million, its monster success has led to rival enterprises introducing their own services in order to gain customers.
Roku has an especially attractive business model because it stands to benefit no matter which specific streaming service ends up with the most subscribers -- be it Netflix, Walt Disney's Disney+, AT&T's HBO Max, or Amazon Prime Video. That's because they all use Roku as a gateway to reach viewers, helping Roku increase its user base as well as generate more advertising income and various fees.
As more consumers shift from traditional cable TV to streaming, Roku will gain still further. It is estimated that 27% of U.S. households will have ditched their cable-TV subscriptions in 2021, a trend that was accelerated by the pandemic. Roku, with its leading U.S. market share of 37% among streaming-player companies -- including 56.4 million active accounts that watch an average of three-and-a-half hours per day -- is well-positioned in the industry.
This growing and engaged user base makes Roku a highly effective tool for connected-TV advertising capabilities as well. Businesses of all sizes -- from Walmart all the way down to smaller, direct-to-consumer e-commerce companies -- turn to OneView, Roku's ad platform, to execute their targeted marketing campaigns.
Add these favorable traits to a stock that has cratered since July, and Roku is clearly a worthwhile investment in the streaming space.
Booming success of The Roku Channel
There is one thing in particular that makes Roku my favorite streaming stock for 2022, and it's the booming success of The Roku Channel, which was among the top-five streaming services on its platform in the third quarter.
Roku generated 86% of its revenue in the most recent quarter from its video-streaming platform, a proportion that has grown over time compared to hardware sales. The platform business generates high-margin subscription and advertising fees, which are the bread and butter of Roku's operating model.
Usually, Roku takes 30% of the ad revenue on its platform with the remaining 70% going to whichever ad-supported, video-on-demand service (or AVOD) has contracted with Roku. But because The Roku Channel is owned by the company, it keeps 100% of the advertising sales on this digital "real estate."
During the third quarter, Roku added 23 new "Roku Original" titles to its own channel and plans to introduce 50 new shows over the coming two years. Viewers can also watch more than 200 traditional cable-TV channels and licensed content from more than 200 partners. All of this is free. As a result, streaming hours on The Roku Channel have doubled over the past year, and its rising popularity creates an unstoppable flywheel effect.
Why is this so important? Better content obviously brings more viewing of The Roku Channel, and this makes advertising on this channel much more appealing to marketers who want to reach a wide audience. Since all of this ad revenue is Roku's to keep, the company then has more cash to reinvest in more content and attract more viewers. And the cycle goes on.
"The primary focus is on the Roku platform, where The Roku Channel has become a very important asset for us. It's very successful and continues to do well," founder and CEO Anthony Wood commented on the Q3 earnings call. It's no surprise that the average revenue per user jumped 49% year over year to $40.10 in the third quarter.
The Roku Channel has gained some serious momentum this year, and I believe it's a legitimate competitive strength for the overall company. It's one of the biggest reasons I like the business as a top streaming stock heading into 2022.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel owns Netflix and Roku. The Motley Fool owns and recommends Amazon, Netflix, Roku, and Walt Disney. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.
