Is this streaming giant a better choice over trading desk action?
We believe that stock streaming hardware and Roku platform player (NASDAQ: ROKU) are currently a better choice compared to The Trade Desk stock (NASDAQ: TTD) digital advertising technology player, which has a lot of exposure. to the connected television space, despite the reopening of the economy and the relaxation of restrictions linked to Covid-19. While The Trade Desk trades at around 33 times trailing income, Roku trades at a more reasonable 17 times trailing income. Additionally, Roku’s recent growth has also been stronger than that of Trade Desk in recent years. However, there is more to the comparison. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard The Trade Office 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 stay-at-home trend linked to Covid-19, with revenue increasing about 81% year-over-year to $ 645 million in the last quarter, thanks the strong growth of its platform activity that sells advertisements and distributed video content. In comparison, The Trade Desk increased its revenue by 37% in the last quarter, as demand for programmatic digital advertising tools as well as the company’s connected TV advertising business continued to increase. . Longer term, Roku’s revenue has grown at a compound rate of around 51% over the past three years. On the flip side, The Trade Desk has grown its revenue at a slightly lower compound rate of 39% over the past three years.
However, Roku’s revenue growth is set to slow down a bit next year to around 36%, according to consensus estimates, as people are likely looking for more outdoor activities, including eating and drinking. travel, following the relaxation of Covid-19 restrictions. That said, we believe Roku’s long-term growth is sustainable, given the broader pivot to digital streaming and video ads and its hardware-linked lockdown of subscribers. Trade Desk revenue is also expected to grow by around 29% in 2022, according to consensus estimates, due to the company’s strong presence in the connected TV space and the continued shift of marketing investments from traditional channels to retailers. digital channels.
2. Trade Desk margins are thicker
Roku has posted operating margins of around 9% over the past twelve months, compared to around 16% for the Trade Desk. However, Roku’s margins have followed an upward trend, unlike The Trade Desk, which has faced some pressure on margins in recent years due to increased SG&A costs. . As a perspective, TTD margins have fallen from around 23% in 2018 to 17% in the past twelve months, while Roku’s margins have fallen from around -2% to 9% in the same period. .
Looking ahead, Roku has warned that margins will come under some pressure as supply chain constraints and cost pressures hurt its margins in the coming quarters. That said, we still expect margins to increase in the long run as the company’s platform business continues to grow. The Trade Desk’s margins are also poised to improve in the long run, as revenue grows, growing faster than its fixed costs.
3. Both companies have little financial risk
We don’t believe that Roku or The Trade Desk faces significant financial risk. Both companies have little to no debt and their cash positions are also reasonably high, with Roku’s cash-to-asset ratio at 48% and the Trade Desk figure at around 23% as of 2020.
The net of everything
Although we would expect Roku’s short-term growth decline to be more pronounced as the economy continues to reopen after Covid, with more than half of the U.S. population now fully vaccinated against Covid-19 and Promising Covid-19 treatments on the horizon, we still believe Roku’s growth rates will remain higher than The Trade Desk. Additionally, the company’s growing margins, along with its lower income multiple (17x for Roku vs. 33x for Trade Desk), could make the stock the better choice. Additionally, Roku stock remains down around 33% from its July highs, presenting a decent entry point for investors.
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