Investors could hardly be more enthusiastic about Roku (ROKU 2.55%) stock in 2023. Shares of the streaming video specialist have more than doubled this year, compared to a 34% spike in the Nasdaq Composite Index.
That performance easily surpassed returns from industry leader Netflix, which is far more profitable and has a more stable sales footprint. But there are good reasons for Roku's rebound, especially its market share gains in the streaming video niche. On the other hand, the company hasn't made much progress in returning to net profits.
Let's take a closer look at those green and red flags.
The green flag: High engagement
Roku's late July earnings update included good news on the sales front, and Wall Street focused on the company's return to growth in its core streaming platform business. Revenue was up 11%, marking a sharp reversal from the prior quarter's 1% downtick.
Looking closer at engagement levels reveals more reasons for optimism. Roku added nearly 2 million new active accounts, for example, to push its base up to 74 million. These users streamed over 25 billion hours of programming, too, up 23% year over year.
It's also clear that Roku is winning market share in an industry likely to expand for many years, given that viewing hours fell 13% in the U.S. for traditional TV broadcasting. "We delivered solid results in Q2," executives said in a letter to shareholders.
The red flag: Weak profits
Roku's financial trends aren't nearly as positive. The company lost money in its hardware segment thanks to pricing pressures on smart TVs. The average revenue per user also fell in the core streaming division due to the declining advertising market. In fact, this metric worsened to a 7% drop from a 5% drop in the prior quarter.
Roku has been trying to get a hold on its costs for several quarters now, but expenses still rose by 8% this quarter to just modestly trail revenue growth. As a result, operating losses expanded to $126 million from $111 million a year ago. The company lost money on a non-GAAP (generally accepted accounting principles) basis as well, with adjusted losses holding steady at 2% of sales.
Watch Roku stock
Wall Street seems excited by the potential for a sharp earnings rebound ahead once the advertising industry snaps back to growth. But investors might want to simply watch the stock for more concrete signs that Roku can return to sustainable profits. After all, management is projecting another quarter of losses ahead in Q3.
It is encouraging that Roku is expanding its market share and building out its platform in outside markets like Central America. Shareholders can feel reasonably confident that the company will improve on its roughly 1% streaming video share in the core U.S. market, compared to Netflix's 8% level. However, the stock's huge rally in 2023 seems undercut by its persistent losses.
Growth investors with high-risk tolerances might still like the stock at today's prices. But most investors will be in a wait-and-see mode as they look for Roku to show a clear path back toward profitability.
