AMC Entertainment and GameStop have gotten a ton of attention over the past couple of months, as speculators looking for quick profits piled into these Reddit stocks. Even faster than they went up, they can come crashing down, leaving market participants right where they started…
Not only is trading extremely difficult to do, but even if you do score a quick gain, you’re left trying to find the next play. It’s stressful and highly competitive, and the odds for sustainable success are not in your favor.
Here at The Motley Fool, we take a long-term approach to investing. Owning shares in wonderful businesses with competitive advantages can produce fantastic results for the patient investor. Roku (NASDAQ:ROKU) is one of these companies, and here’s why the stock could compound and potentially double your money over time.
Platform business model
Most investors are familiar with the big streaming services, such as Netflix, Disney+, Amazon Prime, and HBO Max. These services spend billions of dollars on content every year in order to drive subscriber growth. Netflix, as the leader, can spread its costs over 204 million members. However, this raises the question of when, or if, the huge expenditures will end.
And with the recent launches of Discovery‘s discovery+ and ViacomCBS‘s Paramount+, it’s clear that the streaming wars are intensifying. So, for the growing number of services, the only way to gain new subscribers is to keep spending on content in the hopes that viewers continue being entertained.
Roku, on the other hand, doesn’t care which services ultimately win because it benefits from the cord-cutting trend itself. The company connects viewers, streaming services, and advertisers on its platform, so the more users it gets, the better the value proposition becomes for all parties. This is a classic network effect, the strongest competitive advantage any company can have.
The previously mentioned streaming services want to be on Roku’s platform, too. According to Netflix, 70% of its streams are viewed on a connected TV, and this is likely the case for the other services as well. Roku’s pre-installed operating system is now on 38% of all smart TVs sold in the U.S., putting it in the prime position.
Even if prospective customers sign up for HBO Max or Disney+ or any other service from a smartphone or laptop, chances are they are going to be spending most of their viewing hours on a TV. Roku’s market-leading streaming players will continue absorbing this demand, giving consumers a one-stop shop to aggregate the many services they will likely be using.
Roku’s results in the most recent quarter were superb. Net revenue and gross profit soared 58% and 89%, respectively, compared to the prior-year period. The business added 14.3 million new accounts in 2020, bringing its total to 51.2 million as of Dec. 31. And the average revenue per user (ARPU) increased to $28.76.
It’s obvious that Roku is thriving, but what’s remarkable is the scalability of the business model. As a greater portion of sales come from the platform business (money from advertising and distribution services), Roku’s profitability will rise. That’s because this revenue is extremely high-margin, and with more users on the platform, companies will increasingly allocate advertising dollars to Roku.
At the mid-point of management’s guidance, revenue is expected to be…
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