Shares of Roku (ROKU -3.53%) jumped on Wednesday, rising several percentage points even as the overall market declined. The stock's big move was fueled by news that the company was doubling down on its cost-cutting efforts and lifting its forecast for third-quarter revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). But were investors right to pounce? Is the growth stock really a good buy today?
Let's take a look at the company, its recent performance, and the stock's valuation to see if it's a good time to buy Roku stock.
A return to double-digit growth
Until Roku reported its second-quarter results in July, there were significant concerns about the company's ability to grow rapidly. Its days of swift growth seemed, increasingly, to be a thing of the past.
Rewind to 2019, before elevated interest in streaming due to COVID-19-related lockdowns in 2020, and Roku's revenue was soaring 52% year over year. Investors have wondered whether the company can get back to a growth rate that even closely resembles this. Though some weakness in revenue is expected due to the uncertain economic environment's impact on ad spend, few anticipated Roku's year-over-year quarterly top-line growth to come to a halt as the company wrapped up 2022. And revenue growth of 1% in the first quarter of 2023 didn't help investors' faith in the company either.
But the tides have turned more recently. In the second quarter, revenue rose 11% year over year, and now management is revising its third-quarter outlook to a target range that is substantially higher than what it was previously expecting. Management said on Wednesday morning that it is now projecting third-quarter revenue to come in between $835 million and $875 million, up from a previous forecast of $815 million. The high end of this range would impressively translate to a year-over-year growth rate of 15%. Even the midpoint of this guidance range represents 12% growth -- 1% faster than the growth rate the company reported in the second quarter of 2023.
While Roku is still a far cry from the 50%-plus growth rates it delivered for investors in 2019 and 2020, it's encouraging to see the top line trending in the right direction. Further, the recent double-digit revenue growth suggests its growth rates could speed up again and top 20%. Returning to that kind of growth pace could ultimately justify the stock's current valuation.
A pricey valuation
There's good reason to be cautiously optimistic about the company's ability to get back to higher growth rates. Still, the stock is pricey, requiring some speculation for investors to justify its valuation. Despite not being profitable yet, the company has a $12 billion market capitalization. However, management is addressing its profitability issue aggressively. On Wednesday Roku announced plans for a 10% workforce reduction.
So, can Roku live up to its stock's valuation? Possibly. When investors consider Roku's position as the top streaming platform in the U.S., its significant trailing-12-month revenue of more than $3.2 billion, a recovering advertising market, consumer cord-cutting trends, Roku's recovering top-line growth, and cost-reduction efforts, a bull case starts coming together nicely. For instance, if revenue can keep expanding at double-digit rates over the next five years and net profit margin reaches 20% by the end of that period, today's price for Roku stock could look like a great entry point when looking back.
There are risks, of course. Competition from Apple, Alphabet, and Amazon could heat up in the space, slowing Roku's growth. But the company has successfully fended off these tech giants for years and will likely continue to do so.
For the investors who do take the plunge and buy shares of the streaming TV company, remember that Roku shares are notoriously volatile. Expect a bumpy ride.
