Roku's (ROKU -10.29%) stock has been unstoppable lately, doubling in price since the start of the year.
Investors who missed the early rally may contemplate buying into the stock. But before they rush into making a hasty decision, they must know what might have caused the stock to outperform in the last few months.
Knowing how it got here will better position us to forecast where the company (and stock) could go from here.
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It wasn't all rosy for Roku in 2023
Roku's stock price might have performed well in 2023, but we cannot say the same for its business.
When it first reported its full-year result for 2022 in mid-February, investors were disappointed with the drastic fall in revenue growth rate, down from 55% in 2021 to just 13% in 2022 . Worse, net profit plunged into the red due to rapidly growing operating expenses . On top of that, revenue came in flat in the final quarter of 2022.
And if investors thought that they had seen the worst, they would be speechless when they saw Roku's first quarter result for 2023. Revenue came in flat again, while loss from operation grew 804% to a negative $213 million.
Just as the COVID-19 pandemic tailwind propelled Roku's business to greater heights, the trend became a massive headwind as global economies reopened. It didn't help that the economy became more challenging, resulting in a contraction in the US advertising industry (down 7.4% in the first quarter of 2023). Most investors (myself included) worried whether Roku's best days were over.
Looking back, Roku's stock price might have bottomed in December 2022 – after falling more than 90% from its peak. Yet, while the stock price was bouncing back, the business didn't show any sign of turning around in the first half 2023. At least, not until Roku reported its second-quarter 2023 results.
But there are early signs indicating that the worst might be over
Investors might have begun the year pessimistic about Roku's business prospects, but there are good reasons for them to be more optimistic as we enter the second half of 2023.
The most significant contributing factor is that Roku has delivered some reassuring numbers in the second quarter of 2023. Financially, revenue resumed its upward trajectory, growing 11% year over year thanks to higher platform income.
On top of that, operational metrics also improved in the quarter. For instance, engagement metrics improved as streaming hours grew 21% year over year, and active accounts grew 1.9 million in the quarter. Besides, Roku's operating system (OS) was the top-selling TV OS in the U.S. for the quarter, larger than the next three largest operating systems combined.
It is also worth mentioning that even when revenue growth was muted, engagement metrics continued to improve in the earlier quarters. For example, streaming hours grew by 23% and 20% in the fourth quarter of 2022 and the first quarter of 2023, respectively, even when revenue stagnated. This suggested that Roku's weak revenue performance resulted from external macro headwinds, not poor execution or diminished prospects.
All said, these early green shoots offer some comfort to investors that Roku might have reached a bottom.
So what's next for investors?
Roku is positioned to ride the growing streaming market and cord-cutting trends in the next few years, making its disappointing performance in 2022 look more temporary than permanent.
Still, it might be too early to declare that the worst is over and that Roku is permanently back on its growth trajectory. We need to see more evidence of the sustainability of revenue growth, preferably with a few more quarters of improved performance.
To this end, Roku has guided third-quarter revenue to be around $815 million, a 7% increase from last year. It also confirmed that it would report positive earnings before interest, taxes, depreciation, and amortization (EBITDA).
It will be a good start if Roku can deliver on its guidance. Regardless, all eyes are on the next few quarters.
