Investment Highlights. In this report, we discuss the relative strategic positions of Roku vs Netflix, update Roku's key value propositions, and summarize 2019 OTT industry research. Roku remains our top mid-cap pick for 2019, and we raise our Roku price target to $150 (from $120). Key take-aways from this report include: a) given similar valuations, we prefer Roku to NFLX; b) Roku's value proposition to advertisers is growing; c) SVOD rev shares represent upside to Roku estimates in 2020 and 2021; d) Roku is the dominant internet aggregator for streamed TV & movie content, like YouTube is for user generated content, at about 1/20th the valuation.
Comparing Roku to Netflix:
• TAM. In 2018, US linear TV revenue was about $150B, of which about $80B was subscription fees paid by consumers to MVPDs and vMVPDs, plus about $70B was ad revenue.
• Single Revenue Stream. The vast majority of streaming services to date have chosen to either charge a subscription fee OR give consumers free programming, supported by advertising. Roku's focus is on free content, supported by ad dollars. Netflix is competing for subscription dollars.
• Valuation. Both Roku and NFLX are currently valued at about 8x EV/2020E revenue, by our estimates. Which is the better way to participate in OTT growth?
• Netflix's Hunger Games. Netflix targets the subscription piece of the US TV ecosystem pie. Over the next 12 months, AT&T's WarnerMedia, Comcast's NBCUniversal, Walt Disney, and Apple will all release new streaming services in the US to compete with Netflix, Amazon Prime, CBS All Access, Hulu, etc. The best SVOD question is: "How many SVOD services will the average US home take?" At 60mm paid US subs at 6/30/19, NFLX has the most to lose unless you believe that US homes will add 3, 4 or 5 new SVOD services. Parks Associates found 28% of consumers said they have subscribed to a streaming service to check out a single title. By implication, NFLX's subs will (at least) churn out for a few weeks during the promotional period of each new SVOD service launch. We estimate NFLX's US streaming revenue in 2019 will be about $9.2B, which is at risk if they don't win.
• Roku Aggregates all OTT services, both ad-driven and SVOD. It is an arms dealer. It is indifferent about which OTT services or business models win. Roku negotiates a 20-30% rev share from every OTT service that wants access to its 30mm homes. At 3.5 hours/day/household of viewing in 2Q19, it would be impossible (our word) to launch a new OTT services without access to Roku's 36% of connected TV homes. Roku's goal is to convince advertisers which spent $70B on TV in 2018 to move some of their money to connected TVs and/or Roku. We estimate that Roku's 2019 ad revenue will be $550mm, suggesting a long growth runway, if successful.
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