Roku (ROKU -10.29%) recently reported its financial results for the third quarter (ended Sept. 30), during which the business posted revenue of $912 million, up 20% year over year. This key number crushed Wall Street expectations, helping explain why the stock has soared almost 40% since the announcement.
Even so, shares of Roku are still down 83% from their all-time high in July 2021 -- and that's after doubling this year. Don't let that scare you away, though. Here's why investors should still think about buying this growth stock.
Looking at the latest quarter
Management pointed to "strong performance in content distribution and video advertising, along with unit sales of Roku-branded TVs" as the primary reasons for the strong quarterly top-line growth. This was very encouraging for shareholders as the company's revenue gain represented a marked acceleration from the previous few quarters.
Roku ended the third quarter with 75.8 million active accounts, a 16% rise compared to the year-ago period. Streaming hours on the platform increased 22% to 26.7 billion, a sign of healthy viewer engagement.
And while average revenue per user of $41.03 showed a 7% drop from a year ago, it wasn't all bad news. The leadership team said that growth of video ads on Roku outpaced the overall ad market in the U.S.
Thanks to cost-cutting, the business posted positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $43 million during the quarter, compared to a loss in the previous four quarters. The goal is still to achieve positive adjusted EBITDA for the entirety of 2024.
For the fourth quarter, Roku is expected to post $955 million in sales. That would translate to 10% year-over-year growth.
Zooming out
When it seems like the economy has never been more uncertain, with investors and consumers still worried about high inflation and interest rates, it's very easy to overly focus on a single quarter's financial results. But for long-term investors, it's absolutely crucial to avoid doing this. Instead, pay attention to the things that really matter for the stock.
In Roku's case, it's extremely encouraging that the business was able to continue improving on a sequential basis upon its three key metrics: account growth, more engagement, and better monetization.
A compelling argument can be made that if a severe recession does end up happening, Roku could see its platform become even more popular. In an effort to save money on leisure and entertainment expenses, households could simply stay home and watch more streaming content.
This company also benefits from the ongoing cord-cutting trend, in which households are ditching their traditional cable subscriptions in favor of streaming services. According to eMarketer, by the end of 2027, only 35% of households in the U.S. will still have a pay-TV subscription. This figure will be down from a 50% share in 2022.
And there's no reason to believe the trend won't continue in the decade ahead. Streaming provides a better consumer experience. Plus, with many services -- like Alphabet's YouTube TV, Amazon Prime Video, Apple TV+, and Warner Bros. Discovery's Max -- all having a foot in live sports, consumers have even more reason to fully make the switch to streaming.
What makes now an opportune time to scoop up shares of Roku is its super-cheap valuation. Yes, the stock has posted a strong return in 2023, but it is substantially below its peak price.
And it currently trades at a price-to-sales multiple of just 3.5, which is about one-third of the average valuation since the business went public in September 2017. This just means that should things play out as hoped, the upside for investors is greater.
