Roku (ROKU -10.29%) investors have some high expectations heading into its upcoming earnings announcement. Shares of the streaming video specialist are trouncing the market since the last quarterly update, mainly thanks to several pieces of good news regarding its growth and cost trends.
It's possible that Roku will fail to live up to those high expectations when it announces Q3 results and issues its updated outlook in a few days. On the other hand, investors might be thrilled to see the company extend the positive momentum that executives have described over the last few months. Let's see which scenario seems more likely.
On the upswing
Roku's late July earnings announcement contained mostly good news for investors. Sure, the digital advertising market remained weak through the early summer. But Roku returned to growth in the core platform business, which rose 11% in Q2 compared to a 1% decline in the prior quarter. On the downside, its net loss expanded to a painful $212 million from $23 million a year ago.
What's really had investors excited, though, are the implications from Roku's early September filing with the SEC. That report showed that management is taking cost-cutting more seriously heading into late 2023. The streaming specialist announced layoffs of about 10% of its workforce, a critical review of its content spending, and several other savings initiatives.
These moves will result in some one-time, non-cash charges to the tune of about $200 million. But they'll put Roku on a more direct path toward profitability over the next few years. Rival Netflix added to investors' euphoria by recently lifting its own operating profit and cash flow outlooks to record levels for 2024.
Sales trends are accelerating
Buying the stock now will expose investors to these potential annual earnings improvements, but there's also good news about growth. Roku said in the same filing that sales are on pace to land between $835 million and $875 million in the third quarter. That's up significantly from the company's late July forecast of just $770 million.
Reaching the halfway point of that range would translate into greater than 20% year-over-year growth, a rate that investors haven't seen from Roku since early 2022. It would mean the streamer is experiencing increasing demand from advertisers for space on its platform.
Roku might also reveal further progress in its other monetization initiatives that include partnerships with big brands and premium content subscriptions. Taken together, these prospects for faster growth and improved earnings are understandably exciting investors as the company approaches its next earnings announcement.
It isn't too late
Even following the stock's rally this year, it is still priced at about half of Netflix's valuation. You can own Roku shares for about 2.6 times annual sales, while the market leader is going for just under 6 times revenue. There's a vast gap between the two companies when it comes to cash flow and profitability, to be sure. And Roku's sales are far less stable since they mostly come from advertising as opposed to steady monthly subscription fees.
Yet buying the stock today could still deliver solid long-term returns as the business takes further steps toward building its own profitable selling approach in the streaming industry. Engagement trends have been stellar even through the revenue slowdown into early 2023, and management is determined to find ways to better capitalize on Roku's growing audience.
The stock price could swing up and down as Wall Street adjusts its short-term forecasts. But Roku has its sights set on achieving much bigger scale in the coming years. Shareholders will likely be glad that they were along for that ride.
