What happened
Shares of media-streaming technology expert Roku (ROKU -5.45%) painted a rosy picture on Friday, inspired by the company's strong second-quarter earnings report. Roku's stock price was up by 20.5% at 10:30 a.m. ET today as investors embraced the robust report.
So what
Three months ago, management set up modest guidance targets for the second quarter. Top-line revenue was expected to stay flattish year over year at roughly $770 million. The bottom line was aimed at a net loss of $175 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) pointed to a substantial loss in the neighborhood of $75 million.
The actual report blew all of Roku's guidance targets out of the water. Sales rose 11% year over year to $847 million. Earnings were still negative, but the unadjusted net loss came in at a milder $126 million, and the EBITDA pain stopped at just $18 million.
Management noted that the streaming market "remains largely unchanged" from the first quarter, with slow digital ad sales but solid demand for Roku-powered smart TVs. Some ad-buying markets showed signs of life, but the overall market mood still inspired another round of conservative guidance targets for the next reporting period.
Now what
Roku has slowed down its operating expense growth in order to mitigate the painful bottom-line results, but the company still acts like a hungry start-up. Despite the challenging revenue trend and the weak state of the digital advertising market in particular, Roku boosted its own sales and marketing spend by 23% year over year.
Roku shares have now doubled in 2023, but it's not too late to build a position in this promising long-term growth stock; the chart is still down 4% in 52 weeks. The price could multiply sevenfold from here and still not quite regain the all-time high from two summers ago.
I keep pounding the table about Roku's tremendous upside and deeply undervalued stock. Earnings will stay negative until the digital ad market gets back on its feet (and possibly a few years beyond that inevitable upswing), as Roku is more interested in growing a dominant global market share than in pocketing profits along the way. Your mileage may vary, but I'm fine with that idea.
This report showed Roku's ability to benefit from a partial recovery in certain portions of the ad-buying market, but it wasn't a ticker-tape parade back to full health. That bit comes later, perhaps in this year's holiday season or in a solidifying 2024 economy. We shall see. Either way, Roku still looks like a great buy, even if you missed Friday's big jump.
