When it comes to streaming to the TV, the first name investors may think of is probably Netflix (Nasdaq: NFLX), probably followed by Amazon (Nasdaq: AMZN) or Hulu.

But the stock I recently recommended to my Maximum Profit readers is the company that first brought those streaming services to your television — and is still innovating today. 

In that respect, Roku (Nasdaq: ROKU) is a pioneer. Founded in 2002, the company was among the first to kick off the “cord cutting” revolution with its small set-top boxes that could turn virtually any television into an Internet streaming machine. These set-top boxes eventually evolved into the Roku Streaming Sticks, a simple yet powerful thumb-drive you could plug into your television and gain access to Netflix, Hulu, Amazon TV and any other streaming services. 

Both users and streaming content providers like Netflix loved the Roku technology. In the early days, Roku wasn’t competing with the big content providers like Google, Hulu, Netflix and Amazon TV. It was simply providing a platform where users could stream any of the content providers. Unlike, say, Apple TV, where they direct users mainly to their own content, Roku is a “one-stop shop” for viewers who want access to multiple content providers. 

Roku not only provides a better lineup for viewers, but its platform is also better, based on ease-of-use surveys. So, it’s no surprise that Roku devices are the market leader with a 37% share. Plus, at roughly $30 a stick, they are much more affordable than the $150 Apple TV fetches. 

The Pivot From Hardware To Software
The company knew it couldn’t rely on selling Roku Sticks, as manufacturing products is a low margin, capital-intensive business. Plus, unlike streaming companies that generate massive amounts of money on subscription revenue, Roku had to settle for a small profit on each stick sold. 

To combat this problem, the company launched its Roku software, or operating system. These days, nearly every television is a “smart TV,” or a TV with software that allows you to stream from multiple content providers without needing a Roku Stick, or Apple TV, or a Google Chromecast stick. 

Roku took advantage of the smart TV revolution and licensed its software to a handful of TV manufacturers such as TCL, Element, Hisense, Hitachi, JVC, RCA, Philips, Sanyo, Sharp and Magnavox. That way, the TV manufacturers could focus on building a good television and had a reliable operating system in Roku to bundle with it. And since Roku simply licenses its software — it has nothing to manufacture — this part of the business generates excellent profits for the company.

#-ad_banner-#Similar to its Roku stick, the company is a market leader in this category as well. About one out of every four smart TVs sold in the United States contains Roku software. 

In 2016, this segment contributed roughly 26% of the firm’s total revenue. In 2017, this segment’s revenue more than doubled and accounted for 44% of total sales. Last year, it grew another 85% and makes up 56% of the firm’s total revenue. As you can see, this has become a real growth driver for the company. 

To be sure, its “legacy” business of selling devices like the Roku Streaming Stick continues to see solid growth. In 2018, it grew by double digits over 2017. 

But Roku hasn’t stopped in its search to diversify its revenue streams…

Advertising: Another Growth Driver
In the last few years, Roku has entered the advertising business. The company gathers a ton of information from users who use its platform. Everything from which content you like, which content you might like, how much content you watch, and audience engagement. This information is extremely valuable to advertisers, as it helps them directly reach the desired target audience. Advertisers on Roku’s platform can reach their audiences with ads that are more relevant, interactive and measurable than advertising delivered on traditional TV. 

Roku doesn’t break out its advertising revenue, but it’s taking a page out of Facebook (Nasdaq: FB) and Alphabet’s (Nasdaq: GOOGL) Google playbook, which we know is extremely profitable for those companies. Plus, in 2017 Roku launched its own channel — the Roku Channel. This means Roku is sort-of competing with the likes of Netflix in terms of attracting viewers, but unlike Netflix, the Roku Channel is free. It doesn’t produce any content; instead, it licenses content from movie studios. It generates revenue by running targeted ads during the programming. 

A Look At The Numbers (And Risks to Consider)
Licensing software and advertising are providing massive tailwinds for Roku, which are showing up in its top-line figures. In 2018, the company pulled in $742.5 million in total sales, a 44.8% increase over the prior year. In the last four quarters, the company has generated nearly $18 million in cash flow, a huge improvement over the $3.5 million loss it reported in the previous four quarters. To top it off, this growth company has a healthy balance sheet of $264 million in cash versus $74.2 million in total debt. 

Roku faces stiff competition in nearly every aspect of its businesses. Its hardware business has to fend off the likes of Amazon’s Firestick, Google Chromecast, and Apple TV. Its software division is contending with Google’s Android operating system, as well as in-house operating systems from TV manufacturers like LG, Vizio and Samsung. This is also a growth company that has yet to turn a profit.

Action to Take 
Now, you could simply buy shares of Roku and hope for the best — but I have a better idea…

I mentioned earlier that this was a recent recommendation in my premium newsletter service, Maximum Profit. We added it to the portfolio based on the market “hack” system we’ve used for the past four years to make gains of 135%, 181%, 242% and more. This same system gave Roku a Maximum Profit score of 98. That’s on a scale of 100, making it one of the highest I’ve ever seen… 

But when it’s time to sell the stock, our market “hack” system will tell us exactly when, allowing us to make bigger gains in less time, and while reducing risk. So if you’d like to know more about this powerful system and how it can work for you — not only with this pick, but others like it, too — watch this short video now.