Roku (ROKU -10.29%) shareholders have been taken to the woodshed over the last couple of years, but its long-term investors finally got some redemption this past week. The streaming stock surged in the wake of the company's third-quarter earnings report and finished the week up a whopping 50%.
After several quarters of weak revenue growth, Roku's top line increased by 20% in the quarter to $912 million, crushing analysts' consensus estimate of $853.2 million. It also returned to profitability on an EBITDA (adjusted earnings before interest, taxes, depreciation, and amortization) basis -- well ahead of when it forecast it would in 2024 -- with a profit of $43.4 million.
Other key metrics were also strong. Streaming hours were up 22% to 26.7 billion, and active accounts rose 16% to 75.8 million.
However, even after last week's gains, Roku stock is still down more than 80% from its 2021 peak, and the stock looks poised to keep moving higher. Here are three reasons why.
Image source: Getty Images.
1. The headwinds it faces are temporary
Roku's revenue growth has accelerated in spite of persistent headwinds in the streaming video industry. The ad market is still weak, and uncertainty persists in the macroeconomic environment. In its own outlook, the company described an "uncertain macro environment and an uneven ad market recovery." Indeed, some forecasters still expect a recession is going to come, and pressure on the ad sector could remain in the near term, though it will rebound over the long term.
Similarly, media and entertainment spending, a key ad vertical for the company, is down due to the ongoing actors' strike. That demand is likely to come back once the strike is resolved, which should give revenue another boost. Additionally, the resumption of film and TV production will help fill whatever gap in new content might occur.
2. The streaming transition is accelerating
If there's a silver lining to the slowdown in the ad sector, it's that linear media is getting hit even harder than the streaming sector, and it's leading to an acceleration among advertisers and viewers in the switch to streaming. Roku said that traditional linear TV ad spending was down 12% in the quarter and linear TV ad scatter, or last-minute buys, fell by 27%.
Meanwhile, Roku continues to see solid evidence of growth across its key metrics. In addition to revenue, its active user base, and viewing time, the number of streaming hours on the Roku channel was up 50% year over year, and it represented 3% of U.S. TV streaming hours in September, comparable to Paramount's Paramount+, Comcast's Peacock, and Warner Bros Discovery's Max.
Additionally, the company is diversifying its ad base and content options. It has integrated with more than 30 programmatic ad partners. It has launched campaigns on its Roku City home screen with Walmart and Carnival Cruise Line, and it also became the first streaming partner to launch video ads in the Spotify app on Roku devices.
3. It's benefiting from streaming service behavior
Over the past year or two, nearly every subscription streaming service has raised its prices, and many of them have also launched lower-priced ad-supported tiers.
Both of those decisions benefit Roku as the company gets a cut from streaming subscription fees, and it generally takes 30% of the ad inventory from ad-supported channels that are shown on its platform.
In the shareholder letter, the company even called out those tailwinds, saying that the company benefited from recent price increases from its streaming partners, and the proliferation of ad-based streaming will also help grow its revenue.
Netflix, for example, said just last week that it reached 15 million subscribers for its ad tier, and other streamers are following Netflix's strategy of raising prices on ad-free options in order to drive more subscribers to their ad tiers. In other words, streamers are extracting more revenue from subscribers and advertisers, and Roku will win as this trend continues.
As the leading streaming distribution platform, Roku is well-positioned to take advantage as streaming displaces linear TV. It should benefit from several cyclical and secular tailwinds over the coming years, and profits should scale up as revenue grows.
While the last two years have clearly been a disappointment, the stock looks like it's finally turning the page on a long stretch of underperformance. The stock could still run a lot higher from here.
