The S&P 500 (^GSPC 1.02%) has been anything but predictable this year, rocking and rolling over interest movements and the AI hype, but the broad-market index dealt investors a big win last week.
The S&P 500 finished the week up 5.9% in response to strong quarterly earnings reports, signs the Federal Reserve could be done raising interest rates, and a jobs report that showed employment growth that was slow enough so that investors didn't fear further action from the Fed.
The rally extended well beyond the 500 large-cap stocks that make up the benchmark index, and some of the biggest winners were small and mid-cap stocks that are still down sharply from their pandemic-era peaks. One of those is Roku (ROKU -10.29%), the leading streaming distribution platform whose shares jumped 50.4% after the company smashed analyst estimates in its third-quarter earnings report.
The company reported its fastest revenue growth in several quarters, up 20% to $912 million, easily beating estimates at $853.2 million. That growth reflected a recovery in advertising demand and increased content distribution revenue, or the revenue share it gets from subscriptions from streaming service partners. Roku continued to see strong growth in its user base, with active accounts up 16% to 75.8 million and streaming hours up 22% to 26.7 billion.
However, the biggest surprise in the report was a return to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which came in at $43.4 million, above a loss of $34.4 million in the quarter a year ago. Roku had previously guided for a return in positive adjusted EBITDA by next year, so those results show it's well ahead of schedule in that plan.
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Why Roku is a no-brainer stock to buy right now
Even after last week's gains, Roku stock is still down more than 80% from its pandemic-era peak, but there are a number of reasons to bet on an extended recovery for the stock.
First, there are several tailwinds in the streaming industry that should help propel the company's growth over the coming years. Audiences and advertisers should continue to shift from linear TV to streaming, and recent moves by streaming services will only help Roku's business. For instance, nearly every major streaming service has launched an advertising tier, which benefits Roku as it typically takes 30% of partner ad inventory on its platform. Additionally, a number of streaming services have also implemented price hikes, which will help add to Roku's revenue share, something the company called out in its earnings report.
Roku should also benefit from the ongoing recovery in digital advertising. While the company noted an "uneven ad market recovery," it's likely to see an acceleration in revenue growth as the economy stabilizes, which seems more likely if interest rate hikes are now finished.
Finally, its own growth strategies also seem to be paying as its recently released Roku-branded TVs have won rave reviews, named "Best Overall" by Popular Science, and ZDNet said it was "shockingly capable for the price you pay." Similarly, Roku is expanding its TV partnerships and building momentum in Latin America, as it's now the No. 1 TV operating system in Mexico.
With a market cap of less than $12 billion, Roku still seems undervalued, given its leading position in streaming distribution.
Its business model is scalable, meaning its profitability should improve as revenue grows, and the company issued another round of layoffs in September, which should help keep costs down and lift profitability in the coming quarters.
Roku may not be a member of the S&P 500 yet, but with a recovery in the digital advertising and streaming industries afoot and profitability closer than it seems, it's easy to see the streaming stock joining the broad-market index in the coming years.
