Investors are excited about Roku (ROKU 1.38%) stock again. Shares are up sharply so far this year following a dismal 2022. Wall Street is becoming more optimistic that the streaming video giant can see improving sales and earnings results as the advertising market stabilizes.
But Roku is still generating large losses right now, and sales trends are likely to remain under pressure into late 2023. With that mixed backdrop in mind, let's look at whether the stock is an attractive buy right now.
The good news
The good news in Roku's late-April earnings update centered around engagement and costs. The platform attracted plenty of usage in Q1, with streaming hours rising 20% to cross 25 billion. Roku's user base expanded at nearly the same clip, rising 27% to reach 72 million, compared to 61 million a year ago.
Tough economic times have also spurred some financial improvements. Roku is slashing costs and branching out into new monetization avenues such as retailing partnerships with companies like Best Buy. Management was most excited about Roku's ability to outperform the wider television advertising market, which declined sharply through early 2023. "We delivered solid first quarter results in a challenging macro environment," executives said in a shareholder letter.
The bad news
There was more bad news than good news in its latest report, though. Roku reported a 5% drop in average revenue per user thanks to that advertising slump. Gross profit margin fell 7%, too, in part due to weaker demand for consumer electronics like smart TVs. These results combined to create expanding net losses. And Roku lost money on a non-GAAP basis as well.
ROKU Operating Margin (TTM) data by YCharts
Management's 2023 forecast calls for similarly weak sales results in the Q2 period, with no clear rebound in sight for the advertising industry. Yet Roku is determined to use cost cuts to return to profitability on an adjusted basis by fiscal 2024.
Keep watching
It's hard to look at those trends and see a screaming buy opportunity. While Roku is seeing solid engagement right now, the company is far from demonstrating that it can turn all that viewership into sustainable profits. Its reliance on the advertising market is a risk that needs to be addressed, too, so earnings don't swing wildly with shifts in ad demand.
That's why the stock seems more worth watching than adding to your portfolio right now. Sure, its valuation of 3 times annual sales is down significantly compared to the over 30 that investors were paying at the market's pandemic peak. But investors might prefer Netflix at its P/S ratio of 6 right now. The streaming video giant is highly profitable and targeting an operating profit margin of over 20% this year. It is also growing steadily and generating ample free cash flow.
Until Roku can start showing progress in these critical growth metrics, the stock looks like more of a watchlist candidate than an obvious buy.
