Investors are tuning back into Roku (ROKU -10.29%) stock following blowout financial results from rival Netflix. Yes, the two streaming services have different business models, with Netflix enjoying larger economies of scale and a steady stream of subscription revenue. Meanwhile, Roku is dependent on advertising sales and is still working toward profitability.
Roku will update investors on its latest operating results in early November, and the stock's rally in recent weeks suggests that many investors believe they'll see good news in that announcement. So, before the report arrives, let's look at the main reasons to be bearish or bullish about this growth stock.
The bears have a point about Roku
Bears will begin by pointing out that Roku's stock price is moving in the opposite direction of its earnings power. Operating losses expanded in the first half of 2023, jumping to $300 million from $140 million a year earlier. This slump occurred in concert with sluggish sales trends, too.
Yet share prices are up over 50% year to date. As you might expect, these factors translate into a riskier, more premium valuation for the stock. Roku is valued at 2.7 times annual sales today, up from less than 2 times sales in early 2023.
There are business concerns as well. Roku hasn't diversified its business or landed on a sustainable way to monetize its high engagement levels yet. It still relies mostly on digital advertising demand for growth, plus some revenue from sales of Roku-branded tech devices.
The ad market is susceptible to slumps during economic slowdowns, as investors saw in late 2022. Another deceleration would likely pressure Roku's stock, which has rallied this year.
The bulls love Roku's engagement
If you're bullish on Roku, then you're likely already aware of its strong engagement trends. The streaming service added nearly 2 million users last quarter and surpassed 73 million accounts. Hours of engagement soared 21% to 4.4 billion in the Q2 period, helping push its core Roku Channel into the top tier of the industry, with over 1% of total U.S. screen time in September.
Netflix accounted for about 8%, while Disney's streaming service was 1.9%. It will become easier over time to build up annual profits when users are so enthusiastically using its service.
And Roku is taking strides toward profitability. Management announced an aggressive cost-cutting program that should start to impact earnings results in the second half of the year. Combined with accelerating sales trends, this move could help push the business back into the black by early 2024. And shares are still priced at a large premium compared to Netflix.
The bulls are right
Cautious investors will want to watch the early November earnings report for signs that Roku is achieving both the expected sales rebound and the cost savings that management outlined. If you don't mind some risk, though, you might consider adding the growth stock to your portfolio before there's perfect clarity on these points.
Roku is moving toward sustainable profitability, innovating in its advertising platform, and delighting users with its streaming services. Getting these things right will serve the company well while it works out its monetization challenges over the next few years.
