Shares of streaming service Roku (ROKU - Get Report) skyrocketed 68% in its first day of trading on Thursday as investors ignored competitive forces such as Alphabet's (GOOGL - Get Report) Chromecast and Amazon's (AMZN - Get Report) Fire stick. Shares popped as much as 22% in early trading on Friday.
Earlier this week, Roku had priced its IPO at $14 per share, the high end of its range. At $29.29, the provider of streaming set-tops and HDMI sticks has an official valuation of about $2.6 billion.
Here is a closer look at why its Wall Street debut went so well.
1. Awesome Growth Potential
While investors may have perceived Roku as a play on low-margin consumer hardware going into its IPO, the company is a play on higher-margin services revenue. The company holds much more potential in monetizing its users that have already purchased its hardware.
Roku also has yet to realize its full potential in monetizing said base. Roku devices accounted for 37% of all U.S. streaming media players as of Q1 2017, up from 33% a year earlier.
Roku isn't yet profitable, but has plans to get there quickly via a combination of selling ads on its platform and attracting more overall users, CFO Steve Louden told TheStreet.
2. Ad Sales
Revenue growth for Roku came entirely from a 91% increase in Roku's higher-margin "Platform" revenue. That business covers ad sales, software licensing, and branded channel buttons on Roku remotes.
Speaking of those branded buttons which are placed on Roku remotes, those ad sales provide investors with a bullish opportunity. Ad sales, along with video ad sales could prove highly profitable for Roku in the long-run.
Roku's sticks are affordable and present entry-level consumers an attractive streaming video option, who want more services.
The standard Roku Streaming Stick retails for just $40, while an Express model that has a slower processor and swaps a Bluetooth remote for an infrared one costs just $25. Set-tops supporting 4K video and other value-added features cost between $60 and $100.
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