Roku (ROKU -10.29%) shot higher by more than 31% following its second-quarter 2023 earnings announcement. Investors piled into the stock as the results gave investors more reasons to buy Roku than to sell it.
But despite those gains, the entertainment stock still sells at more than an 80% discount from its all-time high. Amid its current situation, Roku shareholders should keep three green flags in mind while closely monitoring one red flag.
Green flag No. 1: Growing user base
In past quarters, investors got caught up in the struggling ad market, causing them to sour on Roku stock. However, the company's user base has continued to grow. In Q2, the company reported nearly 74 million active accounts. That rose by almost 2 million from Q1 and by 16% compared with the same quarter last year.
Roku credited resilient sales of smart TVs in the U.S., and the company reclaimed its title as the No. 1 selling TV operating system (OS) in the U.S. In fact, it outsold the next three TV operating systems combined, according to market research company Circana.
Additionally, it continues to assert its lead in North America. It was the No. 1 selling TV OS in Mexico for the third consecutive quarter as it also launched sales of Roku TVs in five Central American countries, a move that should keep its active account base growing.
Green flag No. 2: Increased streaming hours
In addition to the market expansions, consumers continue to use Roku's OS more. The company reported streaming hours in Q2 reaching 25.1 billion. The 21% rise from year-ago levels exceeds the growth in customers, indicating increased viewership.
The increased usage is part of a continuing shift from broadcast and cable TV to streaming. Today, 36% of all TV viewing takes place on streaming, according to Nielsen. And for the first time, more than 1% of that took place on the Roku Channel, which should serve as a boon for company advertising.
Green flag No. 3: Improved monetization efforts
Roku also serves as an e-commerce platform through its Shoppable Ad technology. This means that viewers can buy a product while viewing an ad on their TVs.
For advertisers, purchasing Shoppable Ads works like buying standard ads on the platform. Roku makes the ads interactive, and an overlay describes how to make purchases. Roku Pay will process the transactions, and the suppliers will send the item to the customers via the address information they have on file.
Roku has announced partnerships with the likes of Instacart, Walmart, DoorDash, and Shopify to facilitate such purchases. This incentivizes these partners to post more ads on Roku, thus increasing revenue.
Red flag: Falling ARPU
Still, Roku's growth and streaming hours did not prevent average revenue per user (ARPU) from declining 7% versus year-ago levels to $40.67. Despite the optimism surrounding Roku, the total U.S. advertising market remained flat for Q2 on a year-over-year basis.
Yes, Roku's revenue rose 11% over the last year. But this lags the 13% revenue growth in 2022 and the 56% increase in 2021.
Also, the increases were largely on account of the move to streaming, which will likely not be enough to foster a full recovery for the company. Hence, until the ad market improves, investors should expect limited growth in Roku stock.
Should I buy Roku?
When considering both the green and red flags, Roku still looks like a buy overall. Indeed, it is probably premature to declare the slump in the ad industry over, and that could weigh on the stock in the near term. Still, advertising is a cyclical industry, and the cycle should turn in Roku's favor as the economy recovers.
Moreover, Roku has benefited from secular growth in active accounts and streaming hours as TV ad dollars shift to streaming. With viewers able to buy items directly from Roku's platform, revenue should see a boost. Ultimately, that rising popularity and a return to ad-market growth should be the catalysts Roku needs to match and eventually surpass its previous highs.
