Where Will Roku Be in 10 Years?

Roku (NASDAQ: ROKU) has been a phenomenal growth stock since its IPO in Sept. 2017. The streaming device company went public at $14 per share, started trading at $15.78, and is now worth about $420 per share. Let's look back at how Roku grew from a start-up into a $55 billion company in 19 years, and where it might be headed over the next ten years.

How did Roku become a household name?

Roku was founded in 2002 by Anthony Wood. Its name, which is Japanese for "six", represents the sixth company Wood founded. Roku initially sold the PhotoBridge HD1000, a card-reading device that could display photos and videos on TVs, as well as a line of SoundBridge network music players for streaming audio files over local networks. None of those devices made Roku a household name.

A person watches TV at home.

Image source: Getty Images.

But in 2007, Netflix (NASDAQ: NFLX) appointed Wood as its VP of internet television and put him in charge of developing a dedicated set-top box for streaming videos. Wood only stayed with Netflix for less than a year, but Netflix invested in Roku instead of building its own set-top box. Roku launched its first streaming device in 2008, and it eventually became the top streaming device maker in North America.

How did Roku expand and evolve?

Roku's success caught the attention of Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google, which all launched their own streaming devices. When Roku went public, the bears believed that it would be crushed by these tech giants, which could all afford to undercut Roku's prices.

But instead of fretting over its declining hardware margins, Roku expanded its higher-margin software platform, which generates most of its revenue from integrated ads and content partnerships. It also expanded the Roku Channel, its free ad-supported platform for streaming shows, movies, and live TV channels. This shift enabled Roku to expand its total gross margins, sell cheaper devices to stay competitive, and lock in its existing viewers.

The next ten years

Between the first quarters of 2017 and 2021, Roku's active accounts nearly quadrupled from 14.2 million to 53.6 million. Its users streamed more than five times as many hours of content, while its average revenue per user (ARPU) more than tripled. That growth coincided with the rising popularity of streaming services and the slow death of traditional pay TV platforms.

Roku's annual revenue rose from $513 million in 2017 to $1.78 billion, representing a CAGR (compound annual growth rate) of 51.4%. Analysts expect its revenue to rise 55% this year and increase another 38% to $3.81 billion in fiscal 2022.

That growth will be driven by the expansion of its software platform, which should continue to attract more advertisers as traditional TV platforms fade away. In the U.S., ad spending on connected TV (CTV) platforms could surge surge from nearly $21 billion this year to $100 billion in 2030, according to BMO Capital Markets.

If Roku merely matches the industry's projected CAGR of 18.9% during that period, it could generate more than $13 billion in annual revenue in 2030. But Roku could easily outpace the broader market, for two simple reasons.

First, advertisers will likely pour more money into leading platforms like Roku instead of its smaller rivals. Second, the Roku Channel, which now offers exclusive original shows from the defunct streaming platform Quibi, could continue expanding as a top ad-supported streaming service. It might even follow Amazon's lead and add cloud-based games to that ecosystem.

Meanwhile, Roku's device business will continue to bring in a lower percentage of its revenue and gross profits. It already plans to sell its devices at a gross margin "close to zero" this year, but it expects its total gross margins to hold steady in the mid-40s as its software margins rise.

The road ahead

Roku could evolve from a streaming device maker into a diversified software, CTV advertising, and streaming media giant over the next decade. The road could be bumpy -- and it will inevitably face tough competition from its streaming ecosystem rivals -- but I believe its stock will outperform the broader market over the next ten years and grow into its high valuations.

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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Apple, and Roku. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, and Roku. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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