Few stocks got hit as hard in the tech sell-off as Roku (ROKU -10.29%).
From peak to trough, the streaming stock fell more than 90%, and it wasn't just a slowdown in digital advertising that sank the stock. Management also mistimed a ramp-up in spending, leading to wide losses on the bottom line.
However, in line with the broader recovery among tech stocks this year, Roku has bounced back, and the stock gained another leg up in its second-quarter earnings report, climbing 31.4% in Friday's market session.
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Turning the corner
After near-flat revenue growth in the last two quarters, the top line accelerated to 11% growth in the quarter, with revenue coming in at $847.2 million, easily beating $773.4 million.
While management said headwinds in digital advertising continued to persist, especially in areas such as tech and media and entertainment, other verticals showed signs of recovery, such as consumer packaged goods and health and wellness.
That wasn't the only positive sign in the quarter. The number of active accounts climbed 16% from a year ago to 73.5 million as the company signed up 1.9 million users in the quarter. Streaming hours jumped 21% to 25.1 billion, showing that Roku continues to capitalize on the shift from linear TV to streaming.
After posting wide losses on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA), the company took significant steps to narrow its EBITDA loss in the second quarter, coming in at negative-$17.8 million. On the bottom line, Roku's loss per share on the basis of generally accepted accounting principles (GAAP) improved from $0.82 to $0.76, which easily beat the analyst consensus of a loss of $1.27.
In addition to the numbers, Roku is making progress in its strategic goals. The Roku Channel had its biggest audience ever, capturing 1.1% of total U.S. TV viewing time in May, according to Nielsen. That's even with Comcast's Peacock and just behind Warner Bros. Discovery's HBO Max at 1.2%. It appears that the Roku Channel, which is free, could be a significant growth driver for the company. The Roku Channel also received 12 Emmy nominations, including eight for Weird: The Al Yankovic Story.
The company also continued its international expansion, ranking as the top-selling smart TV operating system in Mexico for the third quarter in a row, and it expanded its Roku TV licensing program into Central America.
Finally, early feedback for the Roku-branded smart TV has also been positive, which should help the company build out a new revenue stream and streamline its platform.
Is Roku a buy?
Roku stock had gained 68% year to date coming into the second-quarter earnings report, but the company still has a lot of upside potential, given that its market cap is still less than $10 billion and it is the leading streaming distribution platform in the world.
Like other streaming stocks, Roku needs to bring its spending in line with revenue. Still, the company is already focused on doing that, saying it intends to generate an adjusted EBITDA profit for the full year in 2024.
In terms of usage, Roku also seems to have plenty of growth. Nielsen said streaming took 36% of total TV viewing time, meaning its share of overall TV time could still easily double, especially as more viewing shifts from linear channels.
Even better, advertising is also moving from linear TV and streaming, which is Roku's biggest revenue stream, and growth in ad-supported streaming should drive Roku's revenue growth over the long term.
As the leading streaming distribution platform, Roku is mostly insulated from the competition among content providers and will benefit no matter who wins the streaming race, as long as more viewers cut the cord.
With streaming hours and active accounts both experiencing solid growth, Roku shares could take off once digital advertising demand returns. It's still early in the recovery.
