Roku's Average Revenue Per User Dropped in 2023. Here's Why That's a Good Thing.

Roku (ROKU 0.14%) just updated investors with what was a mostly positive report. Though the streaming platform beat its internal guidance and met Wall Street's expectations for earnings per share, its shares fell on the report and are down 21% this year.

Possibly the worst metric was its average revenue per user, which declined 4% from last year. But that's not as bad as you might think -- in fact, it's a good thing. Here's why.

Coming through on its commitments

Roku has had a few tough years. It's growing its streaming platform, but the road has been pumpy. The company went from unexpected profitability back to losses. It's been trying to dig itself out of that, but given the challenging conditions in advertising, it hasn't been simple.

The company made great strides to close out 2023. It ended the year with 10 million new users and a 14% year-over-year increase in revenue in the fourth quarter. Both platform revenue, which is mostly advertisements, and device revenue, which is its streaming TVs and equipment, rose from last year's numbers. Active accounts reached 80 million, a 14% increase over last year, and streaming hours were up 21%.

Roku still posted a net loss, but it was $78 million versus $237 million a year earlier. Gross margin was 44.5%, up from 42% last year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive after coming in negative last year, and free cash flow was $175 million after an outflow last year.

Pretty much everything went up -- except average revenue per user (ARPU). This means that while Roku's ad revenue continues to rise, new accounts are rising even faster. That's a good thing.

What is average revenue per user?

ARPU is as it sounds, and it measures how much revenue Roku makes per account. Clearly, you'd want to see that number improve. So what happened?

Advertisers have cut their budgets in the inflationary environment, and that's been hurting Roku's platform business. Even though people often think of Roku as a device maker, its platform business is much bigger than its device business, accounting for 84% of the total in the fourth quarter of last year.

Since it's not a customer-facing business, customers may not realize this fact. It used to be Roku's faster-growing segment, but it reported its first and only decline in the 2023 first quarter. It's been reporting similar growth rates to the device segment since then.

Roku uses its device business, which is the top streaming operating system in the U.S., Canada, and Mexico, to bring customers onto its platform. It sells ads on its free Roku channel as well as other channels that stream on its network. Streaming hours increased 63% year over year on the Roku channel, making it an attractive venue for advertisers.

Broadcast TV still accounts for more ad spending than streaming, even though broadcast viewing hours are declining. They decreased 16% in the fourth quarter, according to Nielsen data, while streaming hours are increasing, with much of it on Roku. There's a big gap between the shifting viewing hours and shifting ad spending. But that gap is going to get smaller.

Adult viewers in the U.S., ages 18 through 49, spent 60% of their viewing time on streaming last year; however, advertisers spent only 29% of their TV budgets on streaming. As Roku brings new accounts onto its platform and represents a larger piece of the viewing pie, it's well-positioned to get more ad sales.

Management also pointed out that most of the decline in ARPU was due to international expansion, where it's picking up customers faster than it can monetize them. Yes, an increasing ARPU is even better. But adding customers at a rate that's outpacing a suppressed ad spend is good, too.

Is Roku stock a bargain or a value trap?

At the current price, Roku stock trades at a price-to-sales ratio of less than 3. That's cheap for a company reporting double-digit revenue growth. Considering Roku's improved profitability and future potential, this looks like a bargain.

Management said it focused on efficiency last year, and the results show. It said it's going to work on innovation and growth in 2024. If it can leverage its more efficient operations to grow while maintaining progress in profitability, 2024 could be a big year for Roku stock.