For the second quarter (ended June 30), Roku (ROKU -10.29%) reported revenue of $847 million and a loss per share of $0.76. Both figures beat Wall Street estimates by a wide margin, sending the stock higher immediately following the financial update. And as of July 31, shares are up a ridiculous 132% in 2023, crushing the Nasdaq Composite Index.
But before rushing to buy the stock because of its strong momentum this year, investors should take the time to better understand the bear and bull cases for Roku. Here's a closer look at both sides of the argument with this popular streaming stock. Only then can you make a more informed decision for your portfolio.
What the bears say
The easiest bear argument to make for Roku is that the business continuously loses money. The company posted a nearly $500 million net loss last year. And through the first six months of 2023, the net loss totaled $301 million. Growth companies like Roku promise that they will be able to achieve net income at some far-out future date, but this outcome is always full of uncertainty.
Management expects to produce positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2024, but investors shouldn't believe this to be a substitute for earning real cash profits.
In the most recent quarter, average revenue per user declined 7% compared to the same period last year, marking the second straight quarter this has happened. It's a discouraging trend because it points to Roku's inability to monetize its user base as it gets bigger.
CEO Anthony Wood blames a weaker ad market, citing account growth that has outpaced revenue gains in the platform segment. He believes this can turn around, but shareholders still need to watch this metric closely.
To its credit, Roku commands the leading market share as it relates to smart TV operating systems in the U.S., Canada, and Mexico. But investors must always be worried about Roku's competition, including tech juggernauts like Amazon, Apple, and Alphabet, which all have far greater resources than Roku.
These tech giants all offer hardware products that compete with Roku's media sticks and smart TVs. Moreover, they have their own content offerings. And lastly, Amazon, Apple, and Alphabet have the know-how when it comes to digital advertising. This should keep Roku on its toes.
What the bulls say
As a streaming platform that allows consumers to have all of their favorite subscriptions in one easy-to-use interface, Roku is in an advantageous position. It can avoid the so-called streaming wars that are happening right now.
Roku views itself as an agnostic platform, not having to shell out tens of billions of dollars each year to produce and license content. It simply grows on the backs of the ongoing investments made by content companies.
According to eMarketer, there are now more households in the U.S. that have ditched their cable subscriptions than those that still have one, a trend that will continue. This means Roku should continue growing its user base and revenue as streaming becomes more popular over time. In fact, despite macro headwinds, Roku's active account base keeps rising with each passing quarter, up 16% during the second quarter on a year-over-year basis.
While Roku doesn't generate positive net income now, its balance sheet is strong. As of June 30, the company had $1.8 billion in cash and cash equivalents, compared to no long-term debt. It's not unusual to see earlier-stage, unprofitable growth businesses with sizable debt burdens. Roku doesn't have this problem, which can help it navigate a prolonged downturn in the digital ad market.
Bulls can also point to Roku's stock price. It has soared this year, to be sure, but the stock remains 80% below its all-time high set in 2021. Shares currently trade at a price-to-sales (P/S) ratio of 4.2, representing a sizable discount to its historical average P/S of 10.7.
All else equal, a lower valuation translates to higher potential returns. Investors who believe in Roku's prospects might view this as a compelling buying opportunity.
