BRAZIL – 2019/09/11: In this photo illustration the Roku Streaming Player logo is seen displayed on … [+] a smartphone. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images

We think streaming hardware and platform player Roku stock (NASDAQ: ROKU) is currently a better pick compared to digital advertising technology player The Trade Desk stock (NASDAQ: TTD), which has a large exposure to the connected TV space, despite the reopening of the economy and the easing of Covid-19 restrictions. While The Trade Desk trades at about 33x trailing revenue, Roku trades at a more reasonable 17x trailing revenue. Moreover, Roku’s recent growth has also been stronger than Trade Desk’s in recent years. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard The Trade Desk vs Roku: Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Roku’s Growth Has Been Stronger

Roku has been a big beneficiary of the Covid-19 related stay-at-home trend, with revenues rising by about 81% year-over-year to $645 million over the most recent quarter, driven by strong growth of its platform business which sells advertisements and distributed video content. In comparison, The Trade Desk grew revenue by 37% over the most recent quarter, as demand for programmatic digital advertising tools as well as the company’s connected TV advertising business continued to rise. Looking at a longer time frame, Roku’s revenues have risen at a compounded rate of about 51% over the last three years. On the other hand, The Trade Desk has grown revenue at a slightly lower compounded rate of 39% over the last three years.

However, Roku revenue growth is poised to slow a bit next year to around 36%, per consensus estimates, as people likely seek more outdoor activities including dining and travel following the loosening of Covid-19 restrictions. That said, we think Roku’s long-term growth is sustainable, given the broader pivot towards streaming and digital video ads and its hardware-related lock-in of subscribers. The Trade Desk’s revenues are also poised to grow by about 29% in 2022, per consensus estimates, led by the company’s strong presence in the connected TV space and the continuing shift of marketing dollars from traditional channels to digital channels.

2. The Trade Desk’s Margins Are Thicker

Roku posted operating margins of about 9% over the last twelve months, versus about 16% for the Trade Desk. However, Roku’s margins have been on an increasing trend, unlike The Trade Desk, which has faced some margin pressure in recent years due to an increase in selling and general and administrative expenses. For perspective, TTD Margins declined from around 23% in 2018 to 17% in the last twelve months, while Roku’s margins have risen from around -2% to 9% over the same time frame.

Now looking ahead, Roku has warned that margins will come under some pressure as supply chain constraints and cost pressures hurt its margins in the next few quarters. That said, we still expect margins to rise in the long run, as the company’s platform business continues to grow. The Trade Desk’s margins are also poised to look up in the long term, as revenues scale-up, growing faster than its fixed costs.


Cash to Assets Ratio

3. Both companies have little financial risk

We don’t think either Roku or The Trade Desk faces much financial risk. Both companies have little or no debt and their cash positions are also reasonably high, with Roku’s cash to assets ratio standing at 48% and The Trade Desk’s figure standing at about 23% as of 2020.

The Net of It All

Although we expect the decline in Roku’s near-term growth to be more pronounced as the economy continues to re-open following Covid, with over half of the U.S. population now fully vaccinated against Covid-19 and promising Covid-19 treatments on the horizon, we still think Roku’s growth rates will remain higher versus The Trade Desk. Additionally, the company’s rising margins, as well as its lower trailing revenue multiple (17x for Roku vs. 33x for Trade Desk), could make the stock the better pick. Moreover, Roku stock remains down by about 33% from its July highs, presenting a decent entry point for investors.

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