3 Things to Know Before You Buy Roku Stock

Depending on your attitude, Roku (ROKU 1.16%) could seem like anything from a screaming buy to a risky, overvalued stock right now. The streaming video giant is attempting to build a profitable business using a model that combines hardware sales and TV content and relies on advertising revenue to power earnings. It remains to be seen whether this novel approach will allow Roku to monetize its large and growing audience in the coming years.

The stock’s volatility in recent quarters reflects Wall Street’s doubts around this core question. Share prices have jumped over 50% in the past year but are down nearly 80% from their 2021 highs. Let’s look at three key things to know if you’re considering scooping up shares today.

1. Roku is getting back to growth

The main factor driving the stock’s recent rally has been Roku’s accelerating growth. A slumping digital advertising market hurt sales through most of 2022 and 2023, but that hangover appears to be over. Revenue rose at a 20% year-over-year rate in Q3, marking a second consecutive quarter of faster gains.

Engagement metrics are strong, just as they were during the pandemic and its immediate aftermath. Roku is steadily gaining users and boosting streaming hours, having just passed 100 billion hours in the 12 months that ended in late September.

The difference has been rebounding advertising demand, which is great news for the business. It’s even more encouraging that Roku is boosting ad sales even as big advertisers pull back their spending in the traditional TV arena. Continued success here will bolster the bullish viewpoint that sees Roku gaining more than its fair share of advertising revenue over many years.

2. Roku is moving toward profits

Roku hasn’t yet built sustainably strong profits into its selling approach, which for many investors is a huge knock against the stock. Its operating loss in the first three quarters of 2023 ballooned to $688 million from $281 million a year earlier. Average revenue per user fell 7% year over year in Q3 to $41 on an annual basis.

In contrast, Netflix (NFLX 0.50%) generates ample cash flow and a 20%-plus profit margin from its subscription-based selling approach. Roku will have to close that performance gap before investors can feel confident in its wider earnings ambitions.

ROKU Operating Margin (TTM) Chart

ROKU Operating Margin (TTM) data by YCharts

The good news is that management is busy slashing costs today. Those initiatives should combine with accelerating growth trends to push the company toward profitability in 2024. Conversely, if progress doesn’t occur on this key point, then the streaming video stock is likely to underperform for its shareholders.

3. Roku’s upcoming report should offer an update on its rebound strategy

Investors will receive answers to many of their short-term growth questions when Roku announces Q4 results in mid-February. That report should also feature management’s official outlook for the 2024 year, including executives’ views on the advertising market and the streaming giant’s prospects for improving annual earnings.

The stock’s rally heading into the Q4 update suggests that most investors are optimistic that Roku will reveal strong engagement levels along with improving monetization trends. In any case, it will be several quarters at least before shareholders know whether management’s rebound strategy is working.

Investors might want to watch the stock for now until there’s more clarity around Roku’s growth prospects and its ability to produce profits when the digital advertising market isn’t expanding. There’s a lot of potential here, but little reason to see Roku as a screaming buy right now.

Source link

About The Author

Scroll to Top