Roku (NASDAQ:ROKU) reported mixed third-quarter results that included large gains in active accounts but also a big increase in net losses. Investors responded by pushing the stock down more than 10% in after-hours trading.

Roku is a difficult company to gauge. The potential to be an intermediary between major streaming platforms and consumers is awesome. But its financial performance so far is not. Losses of $0.22 per share weren't what investors wanted to see after the stock ran up more than 300% this year.

How Roku did in the third quarter

  • Total revenue grew 50% year over year to $260.9 million.
  • Active accounts increased 36%.
  • Total streaming hours jumped 68%.
  • Average revenue per user increased 30% to $17.34.
  • Gross profit rose 50% to $118.5 million.
  • Gross margin took a small hit, easing lower from 45.6% last year to 45.4%.
  • Overall net losses from operations were $26.5 million. That's a 126% increase from Q3 2018.
  • Adjusted EBITDA fell from $2 million in Q3 2018 to a $0.4 million loss in Q3 2019.
  • Net losses came out to $0.22 per share.

Things continue to look solid in terms of growing the business. The company's devices are perfectly situated to serve as a middleman between consumers and various content providers within the rising streaming industry. Roku's big problem is one that resonates with quite a bit of the tech industry: The stock has run far beyond what the company offers in terms of earnings. Unless you're a speculative trader, it makes names like these tricky to invest in. You get big swings, and when a company reports big increases in losses, it can cause drops like this because the value isn't there to back it up.

Remote with streaming service in background

Image source: Getty Images.

Guidance

Looking ahead, Roku anticipates finishing the year with net losses of $66 million to $61 million. That would mark the largest annual loss in the past five years. Full-year revenue, meanwhile, is expected to come in at around $1.1 billion, for a 34.7% increase from 2018. That guidance continues the trend Roku has shown for years. It's growing its business at exceptional rates. It's just not making any money in the process.

This trend, along with the price of the shares, forces investors to make a tough decision of whether to pay huge premiums for the stock while they wait for those future potential earnings to be realized.

Overall, I think the company will be fine. A lot was expected this quarter. But the balance sheet carries more than $385 million in cash, and that buffer makes the quarterly losses more than manageable. The stock, on the other hand, could have some bearish potential. A pullback was bound to happen when you consider the valuation of the stock relative to the lack of earnings. Looking ahead, we see the user growth is strong and revenue gains are robust. Roku simply has to start showing investors something on the earnings side. Whether it's wise to pay a premium valuation for a company that's likely to lose more than $60 million this year is a different story. 

I think a wise investor has to be neutral here. A lot of future potential already seems baked into this one. My bet is that Roku shares will have a hard time finding renewed momentum this year. It's a situation where the company has to create future gains that will justify its current share price, rather than having a share price that can react positively to future gains.