Roku (ROKU 1.91%) is back in Wall Street's good graces. The streaming platform specialist had a brutal 2022, but shares have trounced the market so far this year and have even left Netflix (NFLX -0.51%) far behind.
The surge mostly reflects rising optimism around growth stocks, but also Roku's potential for an earnings rebound ahead. So, let's take a closer look at whether the stock has become too expensive again, or if first-quarter earnings reports on the way from both Roku and Netflix will point to bigger gains ahead.
The sales update
Sales expectations are low heading into Roku's first-quarter update, which will likely come in late April or early May. Management said in mid-February that the advertising market was still under pressure into early 2023.
That's the main reason most Wall Street pros are looking for revenue to fall 4% in the first quarter, to about $707 million. Netflix is expecting a modest first-quarter sales increase, meanwhile, as its business is far more reliant on subscription revenue over advertising sales.
Roku could still show strong engagement figures, which are the foundation for a return to accelerating sales gains. Streaming hours and viewer levels were strong through 2022, after all. And advertisers continue to shift toward streaming TV from traditional TV. Yet the business likely won't rebound until the wider ad market starts growing again.
Cost cuts and diversification
The short-term outlook is a bit clearer when it comes to profitability. Roku has been slashing costs for several months so that the company can generate earnings without needing huge sales gains. Executives said in a February shareholder letter that they are committed to delivering positive adjusted earnings before interest, taxes, depreciation, and amortization for the full year 2024. Ideally, the first-quarter announcement will show progress on that score with a slowdown in operating expenses.
The other big strategic initiative is Roku's effort to diversify the business so that it isn't so reliant on volatile advertising sales. This push involves more hardware sales, subscription sales in the smart home device industry, and improvements to the streaming service. Watch for important updates on these projects when Roku announces its first-quarter results in a few weeks.
Looking ahead
The stock's surge in early 2023 suggests that Wall Street is expecting an upgrade to Roku's short-term growth outlook. Netflix is talking about a return to accelerating growth, after all, and could show progress on that score in its first-quarter report in late April. Most Wall Street pros are forecasting just a 5% sales increase in 2023 as the advertising market continues to show weakness.
Growth-focused investors have some good reasons to like Roku stock today even after its current rally. Shares are still priced at less than 3 times annual sales compared to the nearly 5 times that investors were paying a year ago. Netflix is valued at closer to 5 times sales today, mainly thanks to its huge scale, profitability, and bright outlook for expanding cash flow.
Most investors will prefer the streaming industry leader today for exposure to this attractive entertainment market. But Roku stock has a good chance at extending its positive 2023 performance as business trends recover this year.
