Best Growth Stock to Buy for 2025 and Beyond: The Trade Desk or Roku? | TTD Stock | ROKU Stock

Summary

In this video, the speaker compares two stocks, The Trade Desk and Roku, to determine which is the better investment for 2025. The Trade Desk, a leader in the connected TV advertising market, has shown significant improvements in profit margins, cash flow, and return on invested capital. However, Roku, which dominates the TV operating system market with its hardware and software integration, presents a lower valuation despite recent improvements. While The Trade Desk has a stronger business model, Roku's lower price-to-cash-flow ratio makes it the more attractive growth stock for investors seeking value.

Takeaways

• 😀 The Trade Desk is launching its own TV operating system in the second half of 2025, potentially competing with Roku.
• 😀 The Trade Desk focuses on the advertising technology space, while Roku has built its business around hardware and its operating system.
• 😀 Roku's operating system is currently the leading one in the U.S., Canada, and Mexico, making it a strong competitor in the TV space.
• 😀 The Trade Desk’s operating profit margin has improved significantly, reaching 16.2%, while Roku is still negative but improving.
• 😀 The Trade Desk’s business model is asset-light, allowing for better profit margins compared to Roku’s hardware-intensive model.
• 😀 Roku’s hardware is sold at a loss to drive customers to its operating system, which generates the majority of its profitability.
• 😀 Cash flow from operations is much higher for The Trade Desk, with a cash flow-to-sales ratio of 27.3%, compared to Roku’s 3.98%.
• 😀 The Trade Desk leads in return on invested capital (ROIC) with 13.38%, while Roku has a negative ROIC of -7.27%.
• 😀 The Trade Desk is valued at a higher price-to-free-cash-flow ratio of 129, while Roku’s is 72, indicating a significant valuation premium for The Trade Desk.
• 😀 Despite The Trade Desk’s stronger financial metrics, the speaker believes Roku is the better growth stock to buy due to its lower valuation.

Q & A

What is the main focus of The Trade Desk's business compared to Roku?

The Trade Desk focuses on the advertising and ad-buying market, whereas Roku operates in both the hardware and software spaces, with its primary source of revenue coming from its TV operating system.

How does The Trade Desk's new TV operating system impact Roku?

The Trade Desk's new TV operating system could potentially compete with Roku's established operating system, which currently dominates the market in the US, Canada, and Mexico.

What is the difference in the business models of The Trade Desk and Roku?

The Trade Desk follows an asset-light business model, focusing on digital advertising, while Roku is more asset-intensive, involving hardware production like devices that connect to TVs to promote its operating system.

What is Roku’s approach to its hardware products, and why is it important?

Roku sells its hardware devices at a loss to drive customers to its operating system, where it generates most of its revenue and profits. This strategy focuses on growing its ecosystem.

How does Roku's operating system compare to other TV operating systems?

Roku's operating system is highly regarded for its performance, making it the number one TV operating system in markets like the US, Canada, and Mexico, offering a user-friendly experience.

What has been the trend in operating profit margins for both companies?

Both companies saw a decline in operating profit margins in previous years, but they reversed these trends in recent quarters, with The Trade Desk showing a significant improvement, while Roku is also improving, though still negative.

How does the cost of capital impact companies like The Trade Desk and Roku?

Higher interest rates increase the cost of capital, making it more expensive for companies to fund losses. Both companies have taken steps to improve profitability to adjust to this environment.

How does cash flow from operations differ between The Trade Desk and Roku?

The Trade Desk has a significantly higher cash flow from operations (27.33%) compared to Roku's 3.98%, which is partly due to The Trade Desk’s asset-light business model.

Why does The Trade Desk have better profit margins compared to Roku?

The Trade Desk has better profit margins because it operates in a digital services space, without the costs associated with manufacturing hardware, unlike Roku, which involves producing physical devices.

Which company has a better return on invested capital (ROIC), and why is this important?

The Trade Desk has a positive ROIC of 13.38%, while Roku has a negative ROIC (-7.27%), though improving. A positive ROIC indicates better capital efficiency and profitability.

What are the implications of the valuation difference between The Trade Desk and Roku?

The Trade Desk is valued higher, with a price-to-free-cash-flow ratio of 129 compared to Roku's 72. While The Trade Desk’s stronger metrics justify some premium, the large difference in valuation may make Roku a better investment based on its growth potential and lower valuation.