At the onset of the COVID-19 pandemic, ad spending plummeted as advertisers aggressively pulled back on marketing campaigns. But there have been recent data points that suggest the digital ad market is bouncing back. Tech companies that rely predominantly on advertising revenue have been reporting better-than-expected results. For example, Facebook CFO Dave Wehner attributed strong growth to "broad improvements in advertiser demand" last week.

Streaming TV platform Roku (NASDAQ:ROKU) is set to report third-quarter earnings on Thursday. Here's what investors should keep an eye on.

A flatscreen TV mounted on a wall displaying The Roku Channel, with sideboard, a side table, and a potted plant nearby

Consumers are watching more TV while stuck at home. Image source: Roku.

Ad spending is starting to come back

Throughout the crisis, Roku has seen high levels of engagement as people inevitably watch more TV while they stay at home more. But monetizing that engagement is a different story, since the company's important platform segment is predominantly based on advertising.

Roku had 43 million active accounts at the end of the second quarter, while average revenue per user (ARPU) only increased by a modest $0.57 on a sequential basis to $24.92. The company reports ARPU, which measures platform monetization, on a trailing-12-month (TTM) basis. Roku may be able to hit a new monetization milestone of $25 in ARPU.

The company has offered cautious commentary throughout the year, noting elevated cancellation rates in the first quarter and reporting slowing growth in the second quarter. Investors will want to hear management's commentary about digital ad market conditions, which will hopefully be a bit more optimistic this time around.

Like many companies facing coronavirus-related uncertainty, Roku suspended its guidance earlier this year and did not provide an outlook for the third quarter. "The ad industry outlook remains uncertain for Q3 and Q4, and we believe that total TV ad spend will not recover to pre-COVID-19 levels until well into 2021," Roku wrote in its second-quarter shareholder letter in August.

Consensus estimates call for $366.3 million in revenue (representing 40% growth) and a net loss per share of $0.40.

Word on the Street

Earlier this week, Wedbush analyst Michael Pachter tweaked his price target from $160 to $220 while reiterating a neutral rating on the stock. The public health crisis is accelerating adoption of streaming platforms, which in turn creates growth opportunities, according to the analyst.

Ad budgets have already been shifting from linear TV to streaming platforms and the pandemic has only reinforced that trend, with Roku being among the biggest beneficiaries. While Pachter's commentary seems bullish, the neutral rating suggests that investors may already be pricing in those growth expectations.

KeyBanc recently downgraded Roku shares over valuation concerns, combined with muted expectations around the company's international expansion.

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