What happened

Shares of media-streaming technology expert Roku (ROKU 2.53%) rose 50.5% in July, according to data from S&P Global Market Intelligence. The company had its ups and downs last month, but one market-moving event stood out among the rest. Roku reported strong business results for the second quarter, leaving analysts flat-footed and investors inspired.

So what

The average Wall Street analyst expected Roku to report an adjusted net loss of $1.27 per diluted share in the second quarter, based on roughly $773 million in top-line sales. In the actual report on July 27, Roku left these targets far behind. The net loss stopped at $0.76 per share, slightly better than the $0.82 loss per share seen in the year-ago period. Sales rose 11% year over year to $847 million. Roku's stock closed 31% higher the next day.

Management set up third-quarter guidance targets slightly above the Street views at the time, citing "recovery signals" in the struggling digital advertising market and generally rising viewership metrics. The recently introduced cost-cutting program remains in effect. Roku's operating expenses should increase slower than usual in the third quarter as the all-important media and entertainment (M&E) ad-buyer segment wrestles with diminished content schedules in the fall amid Hollywood's twin strikes.

Now what

Keep in mind that Roku's rosy guidance targets were based on very conservative assumptions.

On the earnings call, chief financial officer Dan Jedda said:

M&E historically is our largest and highest-margin ad vertical. It's been challenged industrywide, and we expect it to be further pressured in the second half of this year by the limited fall release schedules arising from the current labor strikes. And so, we factored that into our outlook.

The company has a long history of setting modest goals and blasting them to smithereens three months later. Roku's actual revenue has outperformed the analyst consensus by an average of 8% over the last four quarters. On the bottom line, the average surprise over the same period was 18%.

The stock is off to a strong start in 2023 (jeepers, is it really August already?) with a 114% gain year to date. And I still think Roku's shares are deeply undervalued in the context of long-term growth opportunities in a massive global media market.

The second-quarter report showed signs of a stabilizing entertainment market and increasing digital advertising activity. These bullish trends should combine to drive Roku stock to new heights in 2024 and beyond.