Streaming platform company Roku (ROKU 1.88%) recently reported its earnings results for the first quarter of 2022. Investors got a look at the company's latest numbers, and while that's always great, what CEO Anthony Wood had to say on the earnings call was more interesting.

Roku has become an established giant in the streaming space, with more than 61 million active accounts, and it's still growing at a double-digit pace. But most of Roku's future upside will come from something other than account growth. Let's take a look at why Roku's brightest days might be yet to come. 

Ad revenue is driving growth

Roku grew active accounts in the first quarter of 2022 by 14% year over year to 61.3 million, while average revenue per user (ARPU) grew 34%. When you're purely a streaming subscription business like Netflix, subscribers are your only revenue source, and your subscriber growth means everything to investors.

A person looking surprised while watching TV on a couch.

Image source: Getty Images.

It's a little different for Roku. To be clear, Roku does need to continue growing its platform (i.e., active accounts). But its subscribers are more than just subscribers, they are also a "product" used to sell other things. Roku has steadily built an ad business, targeting its users with programmatic ads (ads tailored to the viewer using the data Roku collects from its users).

The company should steadily pick up users as it expands into new markets (its operating system is No. 1 in the United States and Canada and No. 2 in Mexico), but that type of growth is not what has some Roku investors excited. The ad business that will cater to this growing cohort of subscribers is the real seat of Roku's growth prospects, and Roku should benefit from the tailwinds it will create.

Anthony Wood paints an exciting picture

Roku's overall revenue growth will come primarily from increasing Roku's revenue per user, and ads will play a key role. Most television advertising is still coming through traditional cable, but that tide is beginning to turn. Wood said this on the company's earnings call:

The traditional TV advertising in the U.S. is a $60 billion opportunity. It's larger globally. And for the first time, the reach of TV streaming has surpassed legacy pay TV in the U.S. for adults 18 to 49. And yet most ad dollars for TV have not moved to streaming yet. Only 18% of ad dollars -- ad spend -- traditional TV ad spend has moved to streaming. Yet almost half of all TV time is streaming. And so it's going to be 100% of ad budgets moving to streaming.

A look at the company's shareholder letter for the quarter will show how well Roku is servicing its ad customers. Management noted that the company retained 96% of its customers in the first quarter with $1 million or more in ad spend. Returning advertisers spent an average of 50% more than in the prior year. Roku could enjoy years of growth if it can continue drumming up ad business in a market with so much expansion.

The stock has room to run

So far, how well Roku's ad business is doing is not being reflected in the share price. The stock is down nearly 65% over the past year, with nearly all of the drop coming since the start of the year.

You can see in the chart below that Roku's valuation using the ratio of enterprise value (the market value of the company minus cash) to revenue is at 4, arguably its lowest since its IPO in 2017. However, the company seems like a much better business now than in 2017. Back then, it didn't have the substantial market share or growing ad business that it does today. 

ROKU EV to Revenues Chart

ROKU EV to revenue. Data by YCharts.

When fundamentals improve while the stock price falls, that should be considered an investment opportunity. Roku's stock price could easily fall further as it has been caught up in the broader tech stock and growth stock volatility of the past six months. Using a dollar-cost averaging strategy and exercising some patience on Roku could prove lucrative for investors over the years to come.