How Roku used the Netflix playbook to beat bigger players and rule streaming video
When Netflix founder Reed Hastings spun off the streaming video box he was developing to a little-known start-up called Roku in 2008, he thought it would probably fail.
“There was Xbox and PlayStation and Samsung and Apple TV,” Hastings said in an interview. “Frankly, we didn’t think Roku had much of a chance.”
After first meeting at a conference, Roku CEO and founder Anthony Wood pestered Hastings for months to let his company make a streaming video box for Netflix. Hastings at the time wanted to build the box in-house at Netflix. So the two struck a deal — Wood took a part-time job at Netflix to make the device while remaining CEO of Roku, which had about 15 employees.
That experiment lasted nine months. Hastings wanted Netflix to be available on all sorts of streaming devices, such as Microsoft’s Xbox, Sony‘s PlayStation, and Apple TV. Those companies felt Netflix’s hardware posed a threat to their own businesses. Moreover, people surveyed in focus groups said they wanted a box that could stream more than just Netflix.
So Hastings decided to spin out the division to Roku. Wood received an unfinished device, patents, 20 to 30 Netflix employees (more than doubling the size of Roku) and some cash. In return, Netflix received about 15% of Roku’s equity.
Netflix would later sell its Roku shares to venture capital firm Menlo Ventures to avoid the perception of being conflicted by favoring one streaming distribution manufacturer over another. When Netflix sold its stock in 2009, it claimed a $1.7 million gain on a $6 million investment.
If Netflix had held, its stake would be worth nearly $7 billion today. Roku has been one of the pandemic’s big winners. Shares have have gained more than 480% from March 17, 2020, as the media world shifted to focus on streaming video. Today, Roku’s market capitalization is more than $45 billion.
Wood, who owned more than 28% of Roku at its initial public offering but now owns less than 15% of shares outstanding after various sales through the years, has an estimated net worth of about $7 billion.
“Obviously in hindsight, we missed a fortune,” said Hastings.
To call Roku the offspring of Netflix is literally and figuratively true. While it’s not a carbon copy of its parent, Roku took more than just hardware from Netflix — it took a strand of its corporate DNA.
Wood downplays the comparison. “My relationship to Netflix was obviously very important to Roku,” he said in an interview. “But I only worked there nine months.”
But Roku and Netflix have become market-leading companies worth tens of billions of dollars by out-competing media and technology giants. Both companies could have been acquired in their early days for a fraction of what they’re worth today. Both pivoted their businesses to adapt for streaming video. And both have unusual corporate cultures that can alienate employees who say they live in fear of being fired.
Read more on Roku’s culture: High pay, few extras, no performance reviews
In fact, until recently, Roku’s headquarters were literally next door to Netflix in Los Gatos, California.
Just as Netflix defied the odds to dominate entertainment, Roku overcame widespread industry confusion and doubt to become the U.S. market leader in streaming video distribution. As the media industry has reorganized en masse for a direct-to-consumer world, Roku has become an indispensable intermediary that can guarantee distribution to more than 50 million households.
For its next act, Roku could misdirect the media and technology world again to build its content business — the same kind of move that propelled Netflix to world-beating success.
Pivot, pivot, pivot
Just as Netflix began as a DVD rental company, Roku’s first attempts at business bear little relationship to how it makes money today.
Wood, who graduated from Texas A&M with a degree in electrical engineering, founded Roku in 2002 as a maker of high definition video players. Wood initially funded Roku himself with money he had earned from selling other businesses, including DVR maker ReplayTV, which digital audio device maker SonicBlue bought for $120 million. (SonicBlue has since gone out of business.)
Wood then added streaming audio devices to compete against Apple iPods. Unfortunately, Spotify didn’t exist yet.
“I was a little early on that one,” Wood acknowledged.
Next, he added digital signs — common in sporting event concession areas and even used by CNBC for background monitors. Wood eventually spun that unit out to a separate company called BrightSign.
Then came the Netflix deal.
Wood saw a future where Roku would be a centralized distribution platform for digital television. Although Roku seemed like a hardware company, Wood actually envisioned Roku as a services company, making its revenue from channel store fees and a share of advertising from every TV app carried by the platform.
Netflix was Roku’s first customer, followed by Amazon Video on Demand and MLB TV. More recently, Roku added HBO Max, NBCUniversal’s Peacock, Disney+ and many other subscription streaming services — including Roku’s own The Roku Channel. Roku has become the operating system for more than 15 brands of smart TVs, baking its software directly in consumer’s TV sets — just as Wood predicted more than a decade ago.
The pandemic has accelerated Roku’s foothold in American households. With more than 53 million active accounts, Roku has consistently been the leader among all streaming platforms in the U.S., although Amazon is catching up, based on data from Parks Associates. Roku has taken a 33% to 39% market share every year since 2015. In the first quarter of 2021, Amazon Fire TV tied Roku for No. 1 at 36%. Apple TV was third with 12%, followed by Google Chromecast at 8%.
Wood credits some of Roku’s success to Clayton Christensen’s famous business concept of “The Innovator’s Dilemma” — where incumbent companies couldn’t focus on streaming video because they were too busy protecting their older, linear cable TV models. Christensen’s book just happens to be one of Hastings’ favorites, too.
Wood also noted that Roku’s relatively unchanging user interface and simple remote control have appealed to customers because users want simplicity.
“Many companies just don’t really understand the attitude people have when they’re watching TV,” said Wood. “People want to sit there, drink their beer, and watch TV.”
As Wood envisioned, Roku now makes the majority of its money from services — much of which comes from taking a share of every media company’s total streaming advertising time and selling it. When Roku agreed to distribute Peacock, NBCUniversal‘s streaming service, it took about 10% of what would have been Peacock’s ad inventory to sell for itself, according to people familiar with the matter who spoke on condition of anonymity because details of the deal are private.
Using its viewership data, Roku is developing its own advertising technology to better target commercials than what’s possible on linear television. In March, Roku acquired Nielsen’s advanced video advertising business to begin dynamically inserting linear TV advertising, which increases the number of ads that can be showed on a given show or movie and can be used to better target ads to users.
More recently, Roku has invented two content arms of its own. The Roku Channel licenses content from other media companies and has acquired some original programming, including the content that used to be Quibi, the short-lived streaming service founded by Jeffrey Katzenberg and Meg Whitman. Roku sells advertisements against the programming. Roku is also launching an advertising brand studio to help companies make their own original content.
Last year, Roku made about $510 million from its hardware and branded smart TVs. It made $1.3 billion from platform services.
“We focused on the idea that all TV was going to be streaming,” Wood said. “It was obvious. I’m not sure why there were skeptics.”
A world of skepticism
For years, Wood struggled to find outside financing. Venture capitalists consistently told Roku it was a hardware maker, and hardware wasn’t a good business. Some potential early investors were taken aback by Roku’s modest headquarters in Saratoga Office Center, in Saratoga, California — an uncommon starting spot for Silicon Valley darlings.
The only person who seemed to believe was Menlo Ventures partner Shawn Carolan.
“Silicon Valley does not like to invest in hardware companies,” Carolan told CNBC. That’s because hardware can often be easily replicated and frequently costs nearly as much to manufacture and market as it does to sell. Roku’s hardware, even today, is a zero-profit margin business, according to a person familiar with the matter.
But Carolan saw a clear go-forward strategy based around services.
“I remember this PowerPoint deck I presented around 2009, 2010 where I kind of laid it all out,” Carolan said in an interview. “We called it our popcorn strategy, because movie theaters don’t make money off movies, they make money off the popcorn. How are we going to continue to incrementally add services revenue?”
Wood financed Roku’s Series A round himself. Netflix pitched in $6 million for the Series B as part of the 2008 box transaction. Roku’s Series C, split in two parts in 2008 and 2009, featured one venture capital firm — Menlo Ventures. Carolan and his partners would reinvest again in 2011’s Series D, 2012’s Series E and finally 2015’s Series H — the last round needed before Roku’s IPO.
By 2017, including the Netflix shares it bought, Menlo owned about 35% of all Roku shares. Carolan stayed on Roku’s board from 2008 to 2018.
As the company gained scale, it proved it could make money from its channel store, through revenue shares with media companies, and advertising. Wood expected to hear from other companies interested in acquiring Roku, but few came calling.
Roku held talks with Intel when it toyed with developing OnCue, an Internet-based TV platform, in 2012, according to people familiar with the matter. Intel was eventually willing to pay about $450 million for Roku, but Wood asked for $1.5 billion, according to one of the people. Wood, who several co-workers acknowledged had a quirky personality, told an Intel executive he asked for $1.5 billion because he wanted to open a university in Texas, and that price would cover the expense, according to a person familiar with the talks. The large gap in value doomed the transaction.
About a year later, Amazon approached with an initial offer of about $300 million for the company. Those talks progressed in seriousness, leading Roku to drop its ask all the way to about $690 million, one of the people said. Still, the gap proved too large to cement a transaction.
After that, the offers basically stopped.
“We’ve had less acquisition offers than is normal for a company as successful as Roku,” said Wood, who said he didn’t remember details about the Amazon and Intel offers. “I think it’s because people don’t understand the company. For a long time, they didn’t.”
Waverley Capital managing partner Daniel Leff, who sat on Roku’s board from 2011 to 2018, said the lack of takeover interest from big technology and media companies was stunning.
“Lots of CEOs of big media companies came to spend time with Roku to figure out what it is, what’s streaming, how is it going to disrupt my business?” Leff said. “And I will say, unequivocally, there wasn’t one media executive — and they’re all very smart in their own right — there wasn’t one who believed Roku would be successful, even when it was generating hundreds of millions of dollars in revenue. Even when it went public.”
Roku first attempted to go public in 2014, but bankers told Wood there wouldn’t be appetite for investment until services revenue was 50% of total sales.
“They told us we couldn’t get out, or not at a good price, until we could prove that platform revenue was real,” Carolan said.
So Roku got serious about its platform business. When Roku released its S-1 filing — the document all companies must publish before going public — player revenue in the first half of 2017 represented 59% of total revenue and declined 2% year over year, while platform revenue represented 41% of total revenue and grew 91% from a year earlier.
When Roku went public on Sept. 28, 2017, Carolan broke down in tears.
“I thought, wow, the world finally sees what my partners and I have seen for the last ten years,” Carolan said. “It was just super emotional. And for the past few years, obviously more and more people are finally getting it.”
What’s next: Content
Wood said he’s spending much of his time now on charting out a strategy for The Roku Channel.
Most of the content on Roku’s channel is licensed from other media companies and studios — and it’s not necessarily their best stuff. The 40,000 free movies and TV shows are largely back-end library content that media companies have deemed unimportant for own streaming endeavors. When Roku can get its hands on more popular content, it tends to be limited — for instance, it only has one season of “The Bachelorette” (Season 13, starring Rachel Lindsay).
In addition to licensed content, Roku has begun dabbling in original programming. Earlier this year, Roku bought more than 75 shows that Quibi created for its short-lived service. It also acquired “This Old House,” which is still making new episodes in its 42nd season. Roku has programming for both kids and adults, building offerings for anyone in the family.
There’s some evidence the original programming is finding an audience. The top ten most-watched programs on The Roku Channel from May 20 to June 3 were all Roku originals. Since adding the Quibi library last month, according to Roku’s own data, more Roku users have seen that programming in two weeks than Quibi users in its six-month lifetime.
The strategy at this point looks a lot look like — surprise — Netflix. In Netflix’s early days, it was happy to license whatever content media companies would give it. Former Time Warner Chief Executive Officer Jeff Bewkes famously called it “The Albanian Army,” emphasizing its small stature at the time.
Now, Netflix spends $17 billion on content a year.
Roku plans to spend more than $1 billion on content next year, according to a person familiar with the matter. Wood declined to comment on the exact total, but did admit the budget will grow next year and in years to come.
Wood also said The Roku Channel creates a virtuous cycle. Roku sells advertising against every ad-supported application on its platform. With its own channel, Roku can offer advertisers another way to market brands. That’s more money, which can be used for more content, making the channel a bigger draw for consumers — and more appealing to advertisers.
There’s real money to be made in free ad-supported video. ViacomCBS’s Pluto TV will top $1 billion in ad revenue next year, CEO Bob Bakish said at a recent investor conference.
Roku announced in March it was raising $1 billion — money that ex-board member Leff expects will go largely toward content. With a market capitalization above that of media companies like Discovery, which is merging with WarnerMedia, and ViacomCBS, Roku is a theoretical buyer for Lionsgate and AMC Networks, said MoffettNathanson media analyst Michael Nathanson.
For the time being, Wood is talking like a CEO who wants to stay under the radar. Wood emphasized Roku was a distribution platform first and a content company second. But if content producers don’t watch out, Roku may “eat their lunch” — just like Netflix did, predicted Nathanson.
“This reminds me so much of Netflix in its early days,” Nathanson said. “I used to interview [Netflix Co-CEO] Ted Sarandos at conferences ten years ago, and he’d say, ‘oh, we’re happy with just one or two original shows.’ Meanwhile, they’d be laddering up into better content. I’d argue companies giving Roku content are digging their own grave.”
Hastings told CNBC he isn’t worried about Roku as a competitor because its goals as an advertising-supported service will be different than Netflix, which is subscription based and has no commercials.
“They’re not a big threat for us,” Hastings said.
Wood agreed with Hastings that The Roku Channel isn’t in competition with Netflix. Roku is looking to capture a person’s attention so it can sell advertising — but it doesn’t need to spend so much on content to keep a person paying $5, $10 or $15 each month. The Roku Channel is available on Amazon Fire TV, Apple iOS and Google’s Android, though the company prefers users watch on Roku’s platform, where it can better monetize viewership data.
“We have less expensive content than a subscription service because it’s not required for us to be successful,” Wood said. “For us, it’s about helping users discover content that appeals to them.”
Testing its leverage
Still, Roku may be able to increase the quality of licensed content over time. Direct-to-consumer streaming apps need global distribution, and Roku has a roadmap to enter countries around the world. So far, Roku is also in about one-third of all smart TVs in Canada and is the second-largest operating system for smart TVs in Mexico. Europe is its next likely expansion opportunity, said Nathanson, where Google’s Android TV is the dominant incumbent.
As Roku signs new carriage agreements, it could start demanding that each company give it better content for the Roku Channel. Roku asked for quality titles in its negotiations with WarnerMedia and NBCUniversal, according to people familiar with the matter, but it was rebuffed. It settled on paying for a few older, relatively unpopular series, such as NBCUniversal’s “Coach” — for now.
In recent years, Roku has become more aggressive with its carriage agreement demands, including asking for more advertising inventory, higher app store fees, and better content for The Roku Channel. That’s led to delays in reaching agreements with both HBO Max and Peacock. In April, Roku dropped the YouTube TV app from its platform for new customers in a dispute over manipulating search results and hardware requirements. The main YouTube app remains for everyone, but that deal is up later this year — and could test Roku’s leverage.
“They have to be careful,” said Leff. “Netflix is still one of their biggest partners. They don’t want to compete too hard against all of their content partners.”
Then again, if media companies don’t work with Roku, who can they turn to for distribution? Apple, Google and Amazon are still bigger long-term threats, rich with both data and cash, with the power to outspend legacy media for content if they desire. Roku has used its “we’re just the little guy” approach to its benefit throughout its existence.
For now, Roku’s media partners aren’t worried.
“I don’t think they’re challenging to do business with given their market scale,” said Steve MacDonald, president of global content licensing for A+E Networks. “They’re very collaborative and open about information about how we can better monetize our relationship together. They promote our content. They’re good partners.”
That’s what the media industry used to say about Netflix.
Disclosure: Comcast-owned NBCUniversal is the parent company of CNBC.
Jensen Huang, co-founder and CEO of Nvidia Corp., holds up the company’s AI accelerator chips for data centers as he speaks during the Nvidia AI Summit Japan in Tokyo on Nov. 13, 2024.
Akio Kon | Bloomberg | Getty Images
Artificial intelligence is still an abstract concept for many everyday consumers unsure about how it will change their lives. But there’s no question about whether businesses are finding value in it.
Some of the biggest winners in this year’s stock market rally that’s seen the Nasdaq jump 33% and other U.S. indexes notch double-digit gains have direct ties to the rapid advancements in AI. Chipmaker Nvidia is among them, but it’s not alone.
The other standout theme that’s driven this year’s outperformers is crypto. Starting with the launch of spot bitcoin exchange-traded funds in January, cryptocurrencies had a big 2024, punctuated by Donald Trump’s election victory, which was funded heavily by the crypto industry. A number of stocks tied to crypto got a big boost.
With four trading days left in the year, here are the five best-performing U.S. tech stocks of 2024 among companies valued at $5 billion or more.
AppLovin
Adam Foroughi, CEO of AppLovin.
CNBC
AppLovin entered the year with a market cap of about $13 billion and was best known for investing in a collection of mobile gaming studios that had produced titles like “Woody Block Puzzle,” “Clockmaker” and “Bingo Story.”
As it exits the year, AppLovin’s valuation has soared past $110 billion, making it worth more than Starbucks, Intel and Airbnb. At Tuesday’s close, AppLovin shares are up 758% this year, far surpassing all other tech companies.
While AppLovin went public in 2021, riding a Covid-era wave of excitement in online games, the business is now centered around online ads and booming profits from advancements in AI.
Last year, AppLovin released the updated 2.0 version of its ad search engine called AXON, which helps put more targeted ads on the gaming apps the company owns and is also used by studios that license the technology. Software platform revenue in the third quarter increased 66% to $835 million, outpacing total growth of 39%.
Net income in the quarter soared 300%, lifting the company’s profit margin to 36.3% from 12.6% in the course of a year.
AppLovin CEO Adam Foroughi, whose net worth has swelled past $10 billion, is even more excited about what’s coming. On the company’s earnings call in November, Foroughi raved about a test e-commerce project that allows businesses to offer targeted ads in games.
“In all my years, It’s the best product I’ve ever seen released by us, fastest growing, but it’s still in pilot,” he said.
MicroStrategy
CostFoto | Nurphoto | Getty Images
After climbing 346% in 2023, it was hard to imagine MicroStrategy’s stock finding another gear. But it did.
The company’s share price has jumped 467% this year on the back of a bitcoin-buying strategy that’s made founder Michael Saylor a crypto cult hero.
In mid-2020, the company announced a plan to start buying bitcoin. Up to that point, MicroStrategy had been a middling business intelligence software vendor, but since then, its purchased over 444,000 bitcoins, using its ever-increasing share price as a way to sell stock, raise debt and buy more coin.
It’s now the world’s fourth-largest holder of bitcoin, behind only creator Satoshi Nakamoto, BlackRock’s iShares Bitcoin Trust and crypto exchange Binance, with a stockpile valued at close to $44 billion. MicroStrategy’s market cap has swelled from about $1.1 billion when it was just a software company to $80 billion today.
While the rally was long underway prior to November, Trump’s election victory last month added fuel. The stock is up 57% since then while bitcoin has gained about 44%. Trump once called bitcoin a “scam,” but he was the industry’s preferred choice in this election and was backed heavily by some of the leading players, including Coinbase.
“With the red sweep, Bitcoin is surging up with tailwinds, and the rest of the digital assets will also begin to surge,” Saylor told CNBC soon after the election. He said bitcoin remains the “safe trade” in the crypto space, but as a “digital assets framework” is put into place for the broader crypto market, “there’ll be a surge in the entire digital assets industry.”
Palantir
Alex Karp, CEO of Palantir Technologies, walks to the morning session at the Allen & Co. Media and Technology Conference in Sun Valley, Idaho, on July 10, 2024.
David Paul Morris | Bloomberg | Getty Images
Palantir had a lot of big runs in 2024 on its way to a 380% gain in its stock price. One of its best stretches came last month, when the software company boosted its revenue outlook a day ahead of the presidential election.
The company, which sells data analytics tools to defense agencies, bumped up its target for 2024, with fourth-quarter guidance that blew away analysts’ estimates. Palantir also topped results for the third quarter, leading CEO Alex Karp to declare in the earnings release, “We absolutely eviscerated this quarter, driven by unrelenting AI demand that won’t slow down.”
The stock jumped 23% on the earnings report and then another 8.6% the next day after Trump’s win. Palantir co-founder and board member Peter Thiel was a big Trump booster in the 2016 campaign and helped organize a meeting with tech execs at Trump Tower soon after that election. Karp was one of the attendees.
Karp, however, openly backed Vice President Kamala Harris, the Democratic nominee, in the 2024 campaign. He told The New York Times in a story published in August that Thiel’s earlier support of Trump and the backlash that followed made it “actually harder to get things done.”
Still, Wall Street has rallied behind Palantir following the election on optimism that more military spending will flow to the company.
Karp’s comments in the earnings report ahead of the election suggest the company would be fine either way.
“The growth of our business is accelerating, and our financial performance is exceeding expectations as we meet an unwavering demand for the most advanced artificial intelligence technologies from our U.S. government and commercial customers,” Karp said in a letter to shareholders.
Analysts expect revenue growth in 2025 of about 24% to $3.5 billion, according to LSEG.
Robinhood
Dado Ruvic | Reuters
Robinhood shares more than tripled in value this year, despite a 17% drop on Oct. 31, following disappointing earnings.
Investors looked past those numbers a few days later, driving the stock up 20% after Trump’s election win, as all things tied to crypto rallied. One of Robinhood’s biggest growth engines is crypto, which retail investors can easily purchase on the app, alongside their stocks.
Revenue from crypto transactions jumped 165% in the third quarter from a year earlier to $61 million, accounting for 10% of total net revenue.
In addition to bitcoin, Robinhood users can easily buy about 20 other cryptocurrencies, ranging from popular digital assets like etherium to alt-coins such as dogecoin, Shiba Inu and Bonk. At the company’s investor day in November, Robinhood CEO Vlad Tenev said that crypto is more than just an investment but also a “disruptive technology that will change the underlying infrastructure beneath payments, loans and a wide variety of tradable assets.”
For the fourth quarter, analysts are expecting Robinhood to report revenue growth of over 70% to $805.7 million, according to LSEG, which would be the fastest rate of growth for any quarter since 2021, the year the company went public.
Robinhood’s rally this year has exceeded that of Coinbase, which has jumped 61%. But with a market cap of $70 billion, Coinbase is still twice as valuable.
Nvidia
Nvidia’s astounding run has continued.
Following last year’s 239% gain, powered by excitement around generative AI, Nvidia soared another 183% this year, adding a whopping $2.2 trillion in market cap.
Twice this year Nvidia grabbed the title of world’s most valuable publicly traded company. Apple has jumped back ahead and is approaching $4 trillion, with Nvidia at $3.4 trillion and Microsoft at $3.3 trillion.
Nvidia remains the biggest beneficiary of the AI boom, as the largest cloud vendors and internet companies snap up all the graphics processing units they can find. Annual revenue has increased by at least 94% in each of the past six quarters, with growth exceeding 200% three times in that stretch.
CEO Jensen Huang said in the company’s latest earnings report that the next-generation AI chip called Blackwell is in “full production.” Finance chief Colette Kress said the company is on track for “several billion dollars” of Blackwell revenue in its fourth quarter.
“Every customer is racing to be the first to market,” Kress said. “Blackwell is now in the hands of all of our major partners, and they are working to bring up their data centers.”
While growth is expected to remain robust for a company of Nvidia’s size, the inevitable slowdown is coming. Analysts are projecting year-over-year deceleration over the next several quarters with growth dipping into the mid-40s by the second half of next year.
Nvidia counts on an outsized amount of revenue from a handful of tech giants, so any economic swings present significant risk to investors.
That helps explain why Nvidia likes to tell Wall Street about the extensive roster of companies that are building new AI services and “are racing to accelerate development of these applications with the potential for billions of agents to be deployed in the coming years,” Kress said on the earnings call.
Technology
Digital health companies got pummeled by Wall Street in 2024 as industry adapts to post-Covid slowdown
Doximity at the New York Stock Exchange for their IPO, June 24, 2021.
Source: NYSE
If the Covid era marked a boom time for digital health companies, 2024 was the reckoning.
In a year that saw the Nasdaq jump 32%, surpassing 20,000 for the first time this month, health tech providers largely suffered. Of 39 public digital health companies analyzed by CNBC, roughly two-thirds are down for the year. Others are now out of business.
There were some breakout stars, like Hims & Hers Health, which was buoyed by the success of its popular new weight loss offering and its position in the GLP-1 craze. But that was an exception.
While there were some company-specific challenges in the industry, overall it was a “year of inflection,” according to Scott Schoenhaus, an analyst at KeyBanc Capital Markets covering health-care IT companies. Business models that appeared poised to break out during the pandemic haven’t all worked as planned, and companies have had to refocus on profitability and a more muted growth environment.
“The pandemic was a huge pull forward in demand, and we’re facing those tough, challenging comps,” Schoenhaus told CNBC in an interview. “Growth clearly slowed for most of my names, and I think employers, payers, providers and even pharma are more selective and more discerning on digital health companies that they partnered with.”
In 2021, digital health startups raised $29.1 billion, blowing past all previous funding records, according to a report from Rock Health. Almost two dozen digital health companies went public through an initial public offering or special purpose acquisition company, or SPAC, that year, up from the previous record of eight in 2020. Money was pouring into themes that played into remote work and remote health as investors looked for growth with interest rates stuck near zero.
But as the worst waves of the pandemic subsided, so did the insatiable demand for new digital health tools. It’s been a rude awakening for the sector.
“What we’re still going through is an understanding of the best ways to address digital health needs and capabilities, and the push and pull of the current business models and how successful they may be,” Michael Cherny, an analyst at Leerink Partners, told CNBC. “We’re in a settling out period post Covid.”
GoodRx signage on the outside of the Nasdaq on the day of its IPO, September 23, 2020.
Source: GoodRx
Progyny, which offers benefits solutions for fertility and family planning, is down more than 60% year to date. Teladoc Health, which once dominated the virtual-care space, has dropped 58% and is 96% off its 2021 high.
When Teladoc acquired Livongo in 2020, the companies had a combined enterprise value of $37 billion. Teladoc’s market cap now sits at under $1.6 billion.
GoodRx, which offers price transparency tools for medications, is down 33% year to date.
Schoenhaus says many companies’ estimates were too high this year.
Progyny cut its full-year revenue guidance in every earnings report in 2024. In February, Progyny was predicting $1.29 billion to $1.32 billion in annual revenue. By November, the range was down to $1.14 billion to $1.15 billion.
GoodRx also repeatedly slashed its full-year guidance for 2024. What was $800 million to $810 million in May shrank to $794 million by the November.
In Teladoc’s first-quarter report, the company said it expected full-year revenue of $2.64 billion to $2.74 billion. The company withdrew its outlook in its second quarter, and reported consecutive year-over year declines.
“This has been a year of coming to terms with the growth outlook for many of my companies, and so I think we can finally look at 2025 as maybe a better year in terms of the setups,” Schoenhaus said.
While overzealous forecasting tells part of the digital health story this year, there were some notable stumbles at particular companies.
Dexcom, which makes devices for diabetes and glucose management, is down more than 35% year to date. The stock tumbled more than 40% in July – its steepest decline ever – after the company reported disappointing second-quarter results and issued weak full-year guidance.
CEO Kevin Sayer attributed the challenges to a restructuring of the sales team, fewer new customers than expected and lower revenue per user. Following the report, JPMorgan Chase analysts marveled at “the magnitude of the downside” and the fact that it “appears to mostly be self-inflicted.”
Genetic testing company 23andMe had a particularly rough year. The company went public via a SPAC in 2021, valuing the business at $3.5 billion, after its at-home DNA testing kits skyrocketed in popularity. The company is now worth less than $100 million and CEO Anne Wojcicki is trying to keep it afloat.
In September, all seven independent directors resigned from 23andMe’s board, citing disagreements with Wojcicki about the “strategic direction for the company.” Two months later, 23andMe said it planned to cut 40% of its workforce and shutter its therapeutics business as part of a restructuring plan.
Wojcicki has repeatedly said she intends to take 23andMe private. The stock is down more than 80% year to date.
Digital health’s bright spots
Products of Hims & Hers displayed.
Hims & Hers
Investors in Hims & Hers had a much better year.
Shares of the direct-to-consumer marketplace are up more than 200% year to date, pushing the company’s market cap to $6 billion, thanks to soaring demand for GLP-1s.
Hims & Hers began prescribing compounded semaglutide through its platform in May after launching a new weight loss program late last year. Semaglutide is the active ingredient in Novo Nordisk‘s blockbuster medications Ozempic and Wegovy, which can cost around $1,000 a month without insurance. Compounded semaglutide is a cheaper, custom-made alternative to the brand drugs and can be produced when the brand-name treatments are in shortage.
Hims & Hers will likely have to contend with dynamic supply and regulatory environments next year, but even before adding compounded GLP-1s to its portfolio, the company said in its February earnings call that it expects its weight loss program to bring in more than $100 million in revenue by the end of 2025.
Doximity, a digital platform for medical professionals, also had a strong 2024, with its stock price more than doubling. The company’s platform, which for years has been likened to a LinkedIn for doctors, allows clinicians to stay current on medical news, manage paperwork, find referrals and carry out telehealth appointments with patients.
Doximity primarily generates revenue through its hiring solutions, telehealth tools and marketing offerings for clients like pharmaceutical companies.
Leerink’s Cherny said Doximity’s success can be attributed to its lean operating model, as well as the “differentiated mousetrap” it’s created because of its reach into the physician network.
“DOCS is a rare company in healthcare IT as it is already profitable, generates strong incremental margins, and is a steady grower,” Leerink analysts, including Cherny, wrote in a November note. The firm raised its price target on the stock to $60 from $35.
Another standout this year was Oscar Health, the tech-enabled insurance company co-founded by Thrive Capital Management’s Joshua Kushner. Its shares are up nearly 50% year to date. The company supports roughly 1.65 million members and plans to expand to around 4 million by 2027.
Oscar showed strong revenue growth in its third-quarter report in November. Sales climbed 68% from a year earlier to $2.4 billion.
Additionally, two digital health companies, Waystar and Tempus AI, took the leap and went public in 2024.
The IPO market has been largely dormant since late 2021, when soaring inflation and rising interest rates pushed investors out of risk. Few technology companies have gone public since then, and no digital health companies held IPOs in 2023, according to a report from Rock Health.
Waystar, a health-care payment software vendor, has seen its stock jump to $36.93 from its IPO price of $21.50 in June. Tempus, a precision medicine company, hasn’t fared as well. It’s stock has slipped to $34.91 from its IPO price of $37, also in June.
“Hopefully, the valuations are more supportive of opportunities for other companies that have been lingering in the background as private companies for the last several years.” Schoenhaus said.
Out with the old
The Nasdaq MarketSite is seen on December 12, 2024 in New York City.
Michael M. Santiago | Getty Images
Several digital health companies exited the public markets entirely this year.
Cue Health, which made Covid tests and counted Google as an early customer, and Better Therapeutics, which used digital therapeutics to treat cardiometabolic conditions, both shuttered operations and delisted from the Nasdaq.
Revenue cycle management company R1 RCM was acquired by TowerBrook Capital Partners and Clayton, Dubilier & Rice in an $8.9 billion deal. Similarly, Altaris bought Sharecare, which runs a virtual health platform, for roughly $540 million.
Commure, a private company that offers tools for simplifying clinicians’ workflows, acquired medical AI scribing company Augmedix for about $139 million.
“There was a lot of competition that entered the marketplace during the pandemic years, and we’ve seen some of that being flushed out of the markets, which is a good thing,” Schoenhaus said.
Cherny said the sector is adjusting to a post-pandemic period, and digital health companies are figuring out their role.
“We’re still cycling through what could be almost termed digital health 1.1 business models,” he said. “It’s great to say we do things digitally, but it only matters if it has some approach toward impacting the ‘triple aim’ of health care: better care, more convenient, lower cost.”
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