JDP Capital Management, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A spectacular net return of 109.4% was recorded by the fund for the year end 2020, outperforming its S&P 500 benchmark that returned 18.4%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
JDP Capital Management, in their Q4 2020 Investor Letter said that their investment in Roku, Inc. (NASDAQ: ROKU) has been a top holding and was a large contributor to their 2020 performance. Roku Inc. is a television streaming platform company that currently has a $49.3 billion market cap. For the past 3 months, ROKU delivered a huge 92.21% return and settled at $389.03 per share at the closing of January 29th.
Here is what JDP Capital Management has to say about Roku Inc. in their investor letter:
“Roku became a top JDP holding in April and was a large contributor to our 2020 performance. I was first introduced to the company in 2014 by a venture investor who admired its founder Andy Wood and company’s strategic move that year to partner with Chinese TV manufacturer TLC to build the first Roku TVs.
Roku went public in 2017 for $14 but I was slow to connect the dots between valuation and where the company was heading. I continued to follow along, and the stock’s 50% decline between November 2019 and March 2020, coupled with an acceleration in fundamentals, provided an excellent opportunity to build a full position around $110 per share.
As with all of our investments, we expect Roku to decline by 50% again, at least once, while we own it. Today the market is focused on the near-term transition of pay-TV ad revenue to streaming, accelerated by cord cutting and a pause in live sports during COVID.
However, looking out 5+ years we see a much bigger opportunity for Roku to leverage its global scale, world-class advertising platform, and in-app payment system to grow revenue per user far beyond the $27 per year that it earns today.
Roku is the largest aggregator of third-party streaming TV content in North America based on hours streamed (58.7 billion hours in 2020) across 50 million subscribers. There are now almost as many Roku subscribers as there are across the largest three US pay-TV providers combined.
Roku acts as a toll-bridge between the consumer and content owners that want to build streaming TV audiences and monetize across three ways: transaction video on demand (“TVOD”), subscription video on demand (“SVOD”), and advertising supported video on demand (“AVOD”).
Roku also controls the financial relationship with the consumer for subscriptions and purchases through Roku Pay where users maintain a credit card.
In addtion to Roku TVs and streaming sticks, The Roku Channel is one of top streaming channels in the world with 56 million subscribers and viewable on any internet-enabled device.
Roku has the dominate market share of smart TVs in North America with 38% in the US and 31% in Canada. Roku’s market share is growing as fragmented smartTV OEM operating systems consolidate and the demand for high-quality free streaming TV explodes.
Roku is doing to traditional linear TV what Amazon did to physical retail. We think of Roku as a modern cable company without the physical boundaries and capital requirements that limit cable companies. As a consumer internet business aggregating third-party content, Roku is able to scale globally without significant marginal costs. Longer term we think there is room for two or three players in TV OS and Roku will be one of them. The global pie is big and the majority of pay-TV has
still not cut the cord.The international scale potential for Roku is overlooked because TV distribution is still viewed as country-specifc and the lifetime value of non-US Roku subscribers is less proven.
Roku sells hardware (streaming sticks and TV operating systems) to facilitate customer access to their platform at prices just above breakeven, as a cost to acquire new customers. A hardware buyer becomes a Roku subscriber when she activates her account by providing an email and credit card to begin watching ad supported or subscription channels like Disney+ or The Roku Channel.
The value proposition for the consumer to move from cable TV to streaming is compelling and only limited to the speed of a WiFi connection. The consumer experience is meaningfully better because content is on-demand vs forced time-slots and free content supported by ad loads that are often 75% less than cable TV and more relevant to the viewer.
Lower ad loads are possible within Roku’s closed platform because the identity of the user is known with certainty and responses to advertising can be measured. There is no guessing who is watching, what her interests are and how she responds to specific advertising.
Advertising on Roku is different from traditional digital advertising that relies on stringing together probabilistic (unknown) data about a buyer. Cable TV produces minimal information about who is watching or when, so tiny conversation ratios require bombarding viewers with repeating ads often 16 minutes per hour (26% of an hour).
The ability to pinpoint individual identities allows Roku to reduce the number ads per hour because buyers pay a higher price for targeting that can be measured.
Over time Roku should be able to reduce ad loads even further, to improve user experience, while still increasing ad revenue. The more time a consumer spends watching Roku the better the company’s algorithms can serve hyper-targeted, high-value ads in timely window to known buyers (20% off Domino’s Pizza at halftime anyone?).”
Copyright: wavebreakmediamicro / 123RF Stock Photo
Last December 2020, we published an article telling that Roku, Inc. (NASDAQ: ROKU) was in 59 hedge fund portfolios, its all time high statistics. ROKU delivered a massive 221.65% return in the past 12 months.
Our calculations show that Roku, Inc. (NASDAQ: ROKU) does not belong in our list of the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
