What if I told you America’s fifth-biggest streaming platform after Netflix, YouTube, Prime Video, and Disney+ wasn’t Apple TV+, Hulu, Peacock, or HBO Max, as you might expect?

What if that platform, reaching nearly 100 million households, was worth just $10 billion and unloved by investors?

And what if I also told you that running a streaming app was only a secondary focus for this company, and that their core business lends itself to even more fertile advertising real estate?

What if that company were, arguably, the best positioned to benefit generally from an increase in the streaming of digital content on TVs?

And again, what if I reminded you that this company’s market cap was recently less than Texas Roadhouse, Gamestop, Dick’s Sporting Goods, and Best Buy?

Okay, enough what-ifs, but you’d probably be interested, right?

Great! More below on said company: Roku, best known for its stick-like devices that can make any TV into a “smart” TV.

Every so often, a company finds itself at the peculiar intersection of consumer ubiquity yet financial market irrelevance. You know the brand. You might even use its product daily. Yet the stock sits unloved, the business misunderstood. There may be no better example of this than Roku.

At its peak in 2021, Roku flirted with a $500 share price. Today? Closer to $80-90. The stock has fallen nearly 90% from its highs. And yet, 1 in 3 TVs sold in the U.S. runs on Roku’s operating system (OS). What gives?

Roku has spearheaded the transition from TVs being vehicles for cable & broadband media to becoming the biggest computers in your home (literally), powered by operating systems that make them dynamic and “smart.”

It’s not Netflix, not Amazon, not Disney. But Roku has carved out a unique, and potentially valuable, niche. The problem is that they’ve struggled to turn that niche into profits…so far.

The Aggregator Behind Your Screen

The bigger play now, though, is the reach of Roku’s OS, embedded directly into televisions, often via partnerships with TV manufacturers that want to tap into Roku’s powerful software, or now through TVs that Roku manufactures itself.

That OS is the gateway to streaming: it’s the first thing tens of millions of households see when powering on their TV. And that matters; Roku gets to prioritize what content shows up, sell ad space, and insert itself into the billing relationship when users sign up for a streaming service. You subscribe to Max through Roku? Roku takes a cut.

Helping viewers discover the “right” content using their first-party data, while also creating experiences where they can integrate marketing and advertising, such as promoting prime-time college football games or other sporting events in their Sports Zone section, will be a key way for Roku to monetize its eyeballs.

Still, none of that is where the real money is. The big opportunity for Roku is programmatic advertising. That’s not as good of a business to be in as having tens of millions of people pay you recurring monthly subscriptions priced between $7.99 and $24.99, like Netflix, but a promising business nonetheless.

The genius of Roku is in owning the first screen you see when you turn on the TV.

But I kicked off this email talking about Roku as a streaming content hub, not just an aggregator, so let’s talk about that: Known as The Roku Channel (TRC), Roku has quietly built a massive ad-supported content hub. It houses licensed TV shows, 500+ live digital “channels,” and limited original content, some of which came from an IP acquisition of Quibi’s content (a promising streaming platform that emerged during the pandemic and then, well, promptly crashed and burned).

In Q4 2024, streaming hours on The Roku Channel were up 85% year-over-year. While the content isn’t Emmy-worthy, it’s free, widely distributed, and growing, making it a great vessel for generic ads.

The model is simple: license content, give it away, layer in ads, and share revenue with content partners. No massive studio budgets required. The downside is that Roku doesn’t have the cultural relevance that Netflix and HBO have, providing the option to command premium-priced recurring subscription revenue, but they do have a more neutral position, which can be valuable.

With the success of TRC, becoming the second-most popular app among Roku users, the company has proven just how powerful its real estate and ecosystem are. If they can drive relatively mediocre ad-supported content into being the fifth-biggest streaming app in the U.S., then imagine how much value they can create for any type of advertiser, whether that be other streaming platforms, their shows, or products on Walmart? (Yes, Roku and Walmart have partnered to sell everyday items through Roku.)

Where Did Things Go Wrong?

It might seem like a silly question to ask, given the realities we’ve described above. It sounds like Roku is a company that has dramatically grown its earnings power, while fending off stiff competition from Apple’s TV OS, Amazon Fire sticks & TVs, Google’s Chromecast OS, and Vizio’s Smartcast. Yet, something has clearly gone wrong, at least in investors’ eyes, for the stock to be so relentlessly sold off from its Covid-era peaks.

Yes, to some extent, that was just exuberant markets and over-extrapolation of streaming habits while we were all locked down at home, but for the stock to fall 90%, many believe something more fundamental has gone wrong.

In 2021, Roku looked unstoppable. The stock had quadrupled in under a year. Sales had grown fivefold since 2017. The company was finally profitable. Then, the bottom fell out.

To understand what has happened, we need to look at Roku’s two segments more closely. Roku’s revenue streams are primarily divided into two segments:

1. Platform Revenue: This includes high-margin advertising, content distribution, and subscription revenue sharing (i.e, getting paid to drive sign-ups), accounting for about 85% of Roku’s total revenue last year.

2. Devices Revenue: This segment encompasses sales of physical hardware, from streaming sticks to Roku TVs. While it contributes to the company’s revenue, it’s a loss leader with negative gross margins, meant to drive user adoption and engagement with the Roku ecosystem that can be monetized over time on the platform side (see point 1).

The way to think of it is that A) Roku uses affordable yet unprofitable device sales to establish a foothold in millions of homes, which B) gives them enough scale and reach to build a recurring advertising business that’s more durable and profitable.

For a long time, and even still, Roku has been more focused on grabbing market share and growing their presence than being profitable, which is what caught my attention in wondering whether the market was disregarding their earnings power. That is, the amount of earnings the business could generate when mature and when the focus is on monetization not growth.

So, even though Roku briefly was profitable in 2022, they doubled down on device sales, venturing into TV manufacturing, at a time when input costs were soaring, thanks to Pandemic-era supply-chain disruptions. Device sales have become so unprofitable upfront that it’s weighing down the results of the entire business. Roku, then, isn’t as attractive a business as it would be if it were purely a software-based aggregator of content, kind of like Spotify.

And the market has since realized the constraints on Roku, and dialed back ambitions as it’s become clear how difficult it’ll be for Roku to recreate its success internationally, yet the question is whether investors are too pessimistic on a company that is, ultimately, the primary touchpoint controlling how a huge chunk of Americans consume digital content on their TVs?

Lots of Big Fish Swimming in Roku’s Pond

To answer whether the market is too pessimistic on Roku’s stock, we need to zoom out some more and think about Roku’s moats, as well as the competition that would like to displace Roku as the U.S.’s most popular TV operating system.

I should say, though, that for Roku to hold its position as the top TV operating system in the U.S. for 6+ years is very impressive, given that you’ve got Amazon actively trying to push hundreds of millions of Prime users to buy Fire sticks and TVs that come with Amazon’s TV OS.

Roku has the first-mover advantage and a product that’s generally considered to be superior, but the concern is that the competition will catch up (or already has) and slowly displace Roku, which doesn’t really have any other leverage beyond being the current market leader.

In contrast, Amazon controls device distribution to consumers through its retail marketplace, and that’s a powerful advantage over Roku. On the margins, when someone goes to buy a new Smart TV or streaming stick, Amazon can recommend its own devices over Roku’s in search results. Imagine searching “Roku TV” on Amazon and the first thing you see is a sponsored result for an Amazon TV.

People have many reasons to be loyal to Amazon, which creates value for them in many different ways through Prime Memberships, but perhaps there’s less reason to be fiercely loyal to Roku.

Unfortunately, there’s no relief here outside of Amazon, either. After acquiring Vizio, another competitor in TV manufacturing and TV operating systems, Walmart is also an adversary with huge control over distribution. Again, on the margins, you could imagine that Walmart stores might subtly give priority placement to Vizio TVs over Roku, creating a little extra friction in buying Roku TVs that could compound over time to become a headwind for Roku’s market share.

So, you’re going up against some massive competitors who can, if they want to, exert their influence over how devices are sold, to Roku’s detriment.

Additionally, you’ve got competitors like Apple and Google that also offer products (Apple TV and Chromecast), which hope to be a unified interface between users and fragmented streaming content in a post-cable world.

Big fish are swimming in Roku’s pond, and the fear is that Roku has done all this work to have so much scale, and yet, it hasn’t profited from that yet, and longer-term, it doesn’t have sustainable moats that can protect its first-mover advantage.

Roku had hopes of being a global tech giant, and that hasn’t happened, putting them in a precarious position to defend the large market share they have built in the U.S.

Remember the Pros

So that all sounds…bad. And you’ll find with Roku, more than any company we’ve ever studied, two people can look at it and come to polar opposite conclusions. To one person, Roku is an unloved honeypot just waiting to be acquired by a big tech giant and/or better monetized, and to someone else, it’s a chronically unprofitable business that increasingly doesn’t know what its identity is and missed its opportunity to scale massively.

Yet, more than 140 million people interact with Roku to access TV content. On average, they use Roku for multiple hours every day. Roku’s streaming time is 2–3x higher than its closest connected TV competitors (connected TV = smart TV OS). And more than half of U.S. broadband households start their TV session on Roku’s home screen.

That’s just a reminder of the pros here, before we dwell too much on what could go wrong. And a lot could go awry, don’t get me wrong, but that’s why Roku is a ~$12b market cap and not $50b. So, the market clearly is dwelling on what could go badly, which is why I’m choosing to be more of a contrarian optimist to make the point that there’s something interesting here with Roku.

The bear case, in other words, is obvious to many who have looked at Roku, so I’m here to outline the bull case. Roku is certainly in a fragile position, but I just wonder if it’s as weakly positioned as the market thinks. After all, Roku’s competitors (think Amazon) have been vying for Roku’s presence in households for years now, and still, Roku hasn’t been squashed.

In my podcast on Roku with Daniel, I go into more detail on the cons, and there are a lot: From the outrageous stock-based comp and time wasted on inexplicable ventures, such as building a Roku Smart Home app and selling smart-home devices like connected lights, cameras, and even mini solar panels, there are some things about Roku that just look bizarre and terrible.

This is by no means a quality compounder, but again, I have this nagging feeling that says, “hey dummy, a company with first-party data on what 100 million households do on their TV, how long they watch things, what they watch, and with a giant billboard to advertise on in the middle of people’s homes — that should be worth way more than $12 billion!”

And maybe that instinct is naive, but it leads me to the conclusion that Roku, as a business, is too speculative to bet on, at least for Daniel and I. Other readers may have a higher risk tolerance than we do. I’m hung up on not knowing if or when the economics will work out, though I do think Roku could be worth a whole lot more to a competitor like Amazon, which has a rumored interest in acquiring Roku.

Given that Roku is controlled by its founder and CEO, with majority voting power, and whose grand ambitions for Roku continue to this day, it’s hard to imagine that the sale price for Roku wouldn’t have to be at a considerable premium to where shares currently trade to convince him to sell. So, before we go any further on the thesis, maybe we should quickly touch more on Roku’s top boss: Anthony Wood.

Betting on Anthony Wood

Unfortunately, his billion-dollar idea slipped through his fingertips. He priced the devices too highly, losing out on market share to TiVo, and then doubled down on a controversial ad-skipping feature that got him sued by major media companies.

But instead of disappearing from the scene, Wood landed at Netflix as a VP, working directly under Reed Hastings. It was there that Roku’s current trajectory began. Netflix had been exploring building its own streaming hardware, and Wood led that project. When Netflix decided to kill it (fearing it would create a conflict of interest with their core business), Wood continued to lead the spinoff business, now known as Roku.

Since then, he’s led Roku through every stage of growth, from a clunky set-top box to the leading connected-TV platform in North America. On the one hand, he knows TV as well as anyone and is as motivated as anyone to make Roku succeed, yet his track record with scaling ReplayTV isn’t inspiring.

So far, with Roku, he has arguably learned the lesson about pricing too high; now, the company is selling all its devices at huge losses, which are smothering the profitability of its platform revenues. Meanwhile, employees are richly compensated with stock-based compensation, consistently diluting outside investors.