Roku (ROKU -10.29%) stock trades about 82% off its all-time high set in mid-2021. Its lower valuation coincided with the slowdown in the advertising market over the past two years, which is the primary way the company monetizes its viewers. But from a more short-term perspective, Roku's stock price is up sharply (52% over the past five days) after its Nov. 1 business update showed accelerating revenue growth.
Is the ad market finally turning around for Roku? Let's look at the key highlights from the quarter, and whether the stock is worth buying now.
Roku saw improved revenue growth in Q3
The investment case for Roku is largely based on advertising growth potential. Investors expect that growing viewership should attract more advertisers over time, and that positions Roku for tremendous revenue gains. As a leading brand in streaming, the company is going after a big opportunity in connected TV advertising -- a market estimated to be worth $25 billion and expected to grow 10% per year through 2028, according to eMarketer.
The weakening ad market has made it challenging for Roku to validate its growth opportunity, but the latest quarterly update showed much better business performance. Third-quarter revenue accelerated to $912 million, up 20% year over year. The increase was driven by more subscriptions and transactions made by users on the Roku platform and video advertising.
Moreover, Roku continues to expand its international presence in Latin America and the U.K. Roku's active accounts increased 16% year over year to over 75 million, which could be an advertising magnet over the long term.
Roku's advertising recovery will take time
The main negative for Roku right now is management's outlook. Investors might have hoped that accelerating top-line growth would signal a turnaround for the ad market and better financial guidance for the fourth quarter, but that's not the message management provided.
Instead, Roku executives told investors in the quarterly letter to expect an uneven ad market recovery. While they expect similar year-over-year growth in video advertising in the next quarter, Roku will also face difficult growth comparisons in other areas, such as content distribution (e.g. subscriptions and transactions) and media and entertainment that could "challenge" revenue growth.
Is Roku stock worth buying?
Investors will want to continue watching management's guidance for signs of strengthening advertising demand. It would also be helpful to watch how other streaming companies perform with their ad-supported streaming plans, including Netflix, Paramount Global, and Warner Bros. Discovery. On Warner's Q2 earnings call, CFO Gunnar Wiedenfels said, "While the overall advertising market remains soft, we see the streaming and advertising opportunity well positioned to benefit from secular tailwinds over the long term."
Roku's double-digit growth in active accounts shows a business that is increasing its value to advertisers. It offers an affordable line of Roku TVs that drove strong sales in the quarter. This gives Roku an easy path to continue growing its user base.
Another advantage is The Roku Channel, which offers premium content for free through an ad-supported model. Total streaming hours increased by 50% year over year last quarter. It is proving to be an excellent tool to retain and grow active accounts.
The stock should offer plenty of gains from these lower share prices over time, so it might be worth starting a small position. The stock's 52% jump in the last week might be hinting at even more upside as the ad market recovers.
