What are the advertising deals supporting Roku’s share price?

In an increasingly streaming-first market, Roku’s [ROKU] share price stands to gain on its peers, following a strategic play to further monetise the video-on-demand service. The stock jumped 6.3% after announcing that it was buying Nielsen’s [NLSN] Advanced Video Advertising business on 1 March.

This article was originally published on OptoInvest in the Next Big Idea.

Before the alliance, Roku’s share price saw a good start to the year, climbing 19.1% during the first two months of 2021. However, despite the initial spike from the deal, the stock has since fallen 15.17% as of close on 10 March.

Roku’s share price dip stands in contrast to its 148% gain in 2020 when it outperformed the S&P 500’s 16.3% climb. The stock has also outpaced the US entertainment industry in the past year, Simply Wall Street data shows.

According to ETF.com, Roku has circa 9.7 million shares held across 105 passive and active US-listed ETFs. Its largest current allocation is in the Ark Innovation ETF [ARKK], which stood at 5.85% (as of 10 March).

Roku shares also have a 4.73% weighting in the Roundhill Streaming Services and Technology ETF [SUBZ] (as of 10 March’s close). The ETF — with $46m in assets under management — is the first actively managed fund dedicated to streaming entertainment equities. It debuted on 10 February and has fallen 10.77% since its launch.

Expanding advertising ambitions

Roku had 51.2 million active accounts at the end of 2020, and it is in a good position to assert its dominance in the TV advertising market. By buying Nielsen’s Advanced Video Advertising unit, the company will tap into new technologies such as video automatic content recognition and dynamic ad insertion.

The new targeted and enhanced content measuring tools have many investors and analysts excited about the potential for the company to expand its advertising business to linear TV. The deal will enable Roku to negotiate content and distribution deals, as well as take a larger share of ad inventory, Adam Levy wrote in The Motley Fool.

It will also allow the company to tap into Nielsen’s network of pre-existing advertising deals with major TV media companies. Louqman Parampath, vice president of product management at Roku, told Variety that it plans to have “renewed conversations” with those media partners.

Roku’s advertising focus has already shown significant growth. The company reported that its video advertising impressions had more than doubled year-over-year in the three months ended 31 December, with its average revenue per user increasing $5.62 from the year-ago period, to reach $28.76.

The US streaming platform’s surprise fourth-quarter profit was driven by growth in its advertising segment, which returned to pre-pandemic levels, Cory Carpenter, an analyst at JPMorgan, wrote in a note seen by Barron’s.

Tuning into streaming

Disruptive innovation “typically evolves slowly, until it hits a tipping point”, analysts at Ark Invest wrote in the company’s Bad Ideas Report.

“Since peaking in 2011, the number of US linear TV households has been declining at an annual rate of 2.1%, a rate that we believe will accelerate to -15% at an annual rate during the next five years. Cumulatively, the number of US linear TV households could drop 48% from 86 million as of 2019 to roughly 44 million, a level last seen more than 30 years ago in the late 1980s,” the analysts said.

As the streaming market continues to grow, finding ways to capture not just traditional TV advertising but the broader digital ad spend will open new revenue and profit streams. Roku has positioned itself to be one of the first to make these new advertising deals.

Indeed, Michael Pachter, an analyst at Wedbush, believes the strategy will remain sustainable as more advertisers shift to the platform. “We expect advertisers to continue defecting from linear TV to digital, where Roku is a primary beneficiary as it has a rapidly growing user base and superior targeting capabilities,” Pachter, who held a neutral rating on the stock at time of writing, wrote in a note seen by Barron’s. 

Roku had a consensus buy rating among 20 Wall Street analysts on TipRanks, with an average 12-month price target of $480.10. This would represent a 34.66% increase on Roku’s share price at close on 10 March.

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