Roku (ROKU -10.29%) stock has soared off its 52-week low following a rough year for the advertising market, which is how Roku makes most of its money. The company reported financial results for the second quarter that were better than feared. Revenue growth of 11% year over year was a big improvement over the first quarter's growth of just 1%.
Following strong earnings reports from leading digital advertisers Meta Platforms and Google parent Alphabet, the ad market could be showing signs of a recovery. Here's why this top streaming stock is still a good investment at these highs.
Momentum for a recovery in ad revenue is building
There is still weak demand overall in the advertising market. Roku expects revenue in the third quarter to increase by 7% year over year, down from 11% in the second quarter. But digging into other metrics in the report shows Roku is in a solid position to see accelerating revenue growth as the ad market recovers.
It's impressive to see Roku continuing to maintain consistent double-digit growth in active accounts. It reported a 17% year-over-year increase in the first quarter and reported 16% in the second quarter. Connected TV is a highly competitive market, but Roku is clearly standing out.
Advertisers are taking notice of Roku's growing base, which is now at over 73 million. Roku is building on last year's partnership with Walmart to now show viewers ads from Shopify's merchant partners. This will allow viewers to click on an ad from a Shopify merchant and buy the product on the Roku platform.
Roku recently added McDonald's and Mattel to Roku City, a screensaver it introduced in 2017 that allows companies to display a virtual presentation of their brand to users. In May, Paramount Global was the first entertainment brand to launch a custom Roku City Neighborhood for the Paramount+ streaming service.
The Roku City screensaver has gotten quite popular with viewers. The company says 85% of users have sat and watched the Roku City screensaver scroll by. Roku's ability to offer brands a variety of ways to engage viewers could see a wave of advertising interest in the platform in a strong ad market.
Accelerating revenue growth could send the stock higher
Even in this weakened ad market, Roku is growing faster than the connected TV market, which is projected to grow 6% annually to reach $150 billion in the next decade, according to Graphical Research. "We've built a best-in-class TV streaming platform for viewers, advertisers, streaming services and content owners," CEO Anthony Wood said on the earnings call.
Revenue growth could accelerate into the double-digit range over the next year. Analysts at Wedbush expect the advertising market to remain weak until the fourth quarter, when there could be a rebound in ad spending. The early consensus estimate has Roku growing revenue 7% in 2023 before posting 15% in 2024.
Despite the rise in the share price this year, Roku's price-to-sales (P/S) ratio of 4.1 is not expensive. It seems to be an appropriate discount to Netflix's P/S multiple of 6.1, considering the cyclical nature of Roku's revenue, which is tied to swings in advertising demand. The share price should appreciate along with the underlying growth in the business, which spells market-beating return potential for this top streaming stock.
