Roku (ROKU 4.47%) crushed analyst estimates for the three-month period that ended June 30. Revenue increased 11% year over year to total $847 million. And the loss per share of $0.76 was smaller than expected. Boosted by the latest numbers, Roku shares are up an incredible 95% in 2023 (as of Aug. 11). 

Investor optimism is high surrounding this company. But before adding it to your portfolio, let's take a closer look at one green flag and one red flag that investors need to know about when it comes to this streaming stock. 

1 green flag: The Roku Channel 

Investors know Roku as a platform that connects viewers with all of their different content subscriptions in one easy-to-use interface. With so many streaming choices out there, this service is extremely valuable for consumers. And advertisers now have a way to target these viewers in a connected-TV environment. 

However, the company has been investing in growing the Roku Channel, which provides viewers with free ad-supported content. In the U.S., the business said this service offers 80,000 free movies and TV shows and access to more than 350 cable-TV channels. That's certainly a huge selection of free content. 

The Roku Channel's viewership is growing faster than the company overall, with streaming hours rising 50% year over year. It commanded 1.1% of TV viewing time in the U.S. in May. And at the end of last year, management estimated The Roku Channel reached domestic households totaling 100 million people. 

And it has already become a key competitive asset that can drive engagement and ad dollars. The Roku Channel is incredibly valuable because it's likely that Roku can license the content at cheaper costs than it would be to create original content. Plus, as legacy media businesses look at ways to better monetize their old catalogs, Roku is there to provide wide reach. 

A growing content library attracts more viewership and engagement, exactly what advertisers want. Compared to Roku's typical revenue-sharing agreements that give content companies 70% of the ad inventory, The Roku Channel controls all of the ad inventory, providing the overall business with a high-margin revenue stream. 

Network effects are obviously at play here. More viewers and higher engagement attract advertisers that can better target these consumers. This provides Roku with greater revenue, which can then be used to acquire more content. It's a flywheel effect that has propelled the Roku Channel thus far. 

1 red flag: average revenue per user 

In the most recent quarter, two of Roku's key performance metrics remained strong. Active accounts increased 16% year over year to 73.5 million. And these users streamed a total of 25.1 billion hours of content during the quarter, up 21% compared to Q2 2022. A bigger customer base plus higher engagement is good to see. 

But Roku has been struggling with monetization. Average revenue per user (ARPU) came in at $40.67 in the second quarter, down 7% year over year. This was the second straight quarter that ARPU declined from the year-ago period. 

Management's explanation is simply to blame the weaker ad market, which has proven to be more cyclical than investors had originally thought. This isn't surprising, because executives will quickly curb spending on marketing initiatives if they believe rough waters are ahead for the economy and consumer spending will be under pressure. 

Look no further than the giants in the digital ad industry. Alphabet reported advertising revenue growth of just 7% in 2022. And sales at Meta Platforms decreased by 1% last year. The good news, however, is that both companies are registering accelerating revenue growth, as evidenced by their latest quarterly results. 

Perhaps the connected-TV ad market, which is expected to see revenue rise by 10% per year between 2023 and 2028, is on tap to start bouncing back toward higher gains. This would benefit Roku. But investors need to keep an eye on ARPU trends in the next few quarters to make sure the business is heading in the right direction.