Roku's (ROKU -10.29%) second-quarter results exceeded Wall Street estimates by a huge margin. Revenue jumped 11% year over year to total $847 million. And after posting a net loss of $112 million in the year-ago quarter, the business only lost $108 million in the latest period.
Shares have been on an absolute tear, up 137% through the first seven months this year, boosted by the most recent earnings report. But they're still down a whopping 80% from their all-time peak.
Investors shouldn't be discouraged, though. Here's why Roku is still a growth stock to consider buying right now.
An attractive valuation
With a stock price that's still so beaten down, it's not surprising that shares remain attractively valued. The current price-to-sales (P/S) multiple of 4.2, while much higher than just seven months ago, is way below Roku's historical average of 10.7.
All else equal, a lower valuation multiple indicates the potential for higher future investment returns. That's because as the rest of the market starts to appreciate the company's financial success over time, it should command a higher P/S ratio. At least that's the hope.
Rebounding digital ad market
Generating 88% of companywide revenue in the most recent quarter, Roku's Platform segment, which makes money mainly from advertising, grew sales 11% year over year. This exceeded management's guidance, marking an acceleration from the first quarter of this year when the segment saw revenue fall 1%.
This performance resembles trends that the dominant players in the industry have also been experiencing. Both Alphabet and Meta Platforms, which together command more than half of the overall digital ad market, saw their revenue growth pick up meaningfully in their most recent quarters.
"We are well positioned to reaccelerate growth as the ad market recovers," Roku's Q2 2023 shareholder letter reads. The digital ad market has proven to be very cyclical with spending under pressure when expectations of a recession are high. However, over time, the industry has grown.
The leadership team believes revenue will total $815 million in the current quarter. That would translate to a 7% year-over-year increase.
Zooming out produces a more optimistic picture. Connected-TV ad spending is projected to double between 2022 and 2027 to over $40 billion. Roku is in a prime position to benefit from this growth.
Riding the streaming wave
Investors have plenty of options to choose from when looking to put money to work in the streaming landscape. Netflix, Walt Disney, and Warner Bros. Discovery are obvious choices to play the broad secular trend. The issue with these businesses, however, is that they are perpetually fighting over content. They must continue to spend massive amounts of cash year in and year out to bolster their libraries and attract subscribers.
Roku can avoid this battle altogether. Because there are so many different subscription offerings for consumers to choose from, having a platform like Roku that can bring them all into place has proven to be a valuable service. In fact, the average household has more than three different subscriptions, a figure that could go up over time as cable TV becomes less popular and streaming accounts for an even greater share of TV viewing time.
Roku's active account base, now at 73.5 million, expanded 16% year over year. And these households watched 25.1 billion hours of content on Roku last quarter, up 21%. These are impressive gains that show how the company's business is ready to rebound along with the broader advertising market.
As streaming entertainment keeps poaching viewership from linear TV, it's easy to see Roku registering outsized growth in the years ahead. That makes the stock a worthy investment candidate right now.
