It might seem that investors could hardly be more optimistic about Roku (ROKU -10.29%) stock today. After all, the streaming video specialist's shares more than doubled at one point this year and are currently sitting at over 90% returns in 2023 to date.
Zoom out, though, and that optimistic picture changes. Roku stock is down over 80% from the all-time highs it set when demand was soaring for digital entertainment during the pandemic. Its short-term growth prospects have dimmed substantially since then, but Roku still has a good shot at generating solid returns for patient investors. With that in mind, let's take a closer look at whether this stock is an attractive buy right now.
Returning to growth
The big headline takeaway from Roku's second-quarter report in late July was that Roku is growing again. After declining modestly last quarter, platform revenue expanded at a double-digit rate, giving investors hope that the post-pandemic growth hangover has ended.
Unlike Netflix (NFLX -0.63%), Roku depends on advertising for a large portion of its business. That industry started to recover in the period, injecting optimism into the rebound story. "We are well positioned to reaccelerate growth as the ad market recovers," executives said in a shareholder letter.
There are other signs that Roku's entertainment platform is resonating with TV watchers. Q2 streaming hours jumped over 20% to pass 25 billion. The company's Roku Channel broke into the Nielsen TV ratings in May, and active user accounts rose 1.9 million to 74 million from the first quarter to Q2.
Net losses
Investors won't find as much to like about Roku's financials. The company is generating far less profit on its device sales right now as consumers look to cut costs. Average annual revenue per user on the streaming service is down as well, dropping 7% this past quarter to $41.
ROKU Operating Margin (TTM) data by YCharts.
And Roku has booked an operating loss in each of the last five quarters. Contrast that performance with Netflix, which has remained in solidly profitable territory through the post-pandemic slowdown and is targeting a margin this year of between 18% and 20% of sales. It's unclear when Roku will return to profitability or where that key metric will eventually settle.
The case for caution
As you might expect, Roku is valued at a discount to more successful streaming peers like Netflix. You'd have to pay 3.4 times sales today for the stock while Netflix commands a premium that's closer to 6 times annual sales.
That discount could translate into strong returns for shareholders once the digital advertising market starts expanding at a robust pace again. Roku is making bold moves on the innovation front, too, such as its recent partnership with Shopify aimed at making the purchase process seamless on its streaming platform. Roku's large audience, combined with its ownership of the hardware and software controlling the user experience, should allow it to find even more innovative ways to monetize engagement.
Cautious investors might want to wait to see more progress toward sustainable profitability. But Roku has enough going for it right now, including an attractive stock valuation, to warrant putting it on your watchlist today.
