Like much of the streaming sector, Roku (ROKU 2.11%) stock surged during the pandemic.
The company was a major beneficiary of the stay-at-home effects of the crisis. Its user base soared, along with streaming subscription signups and digital advertising on the platform. 2022 brought a cold dose of reality to the stock, and shares plunged as growth cooled and the company ramped up spending at precisely the wrong time.
Since then, the stock has languished under $100 a share, but its fourth-quarter earnings report earlier in February showed perhaps the strongest sign of life yet since the pandemic.
Overall revenue jumped 22% to $1.2 billion, topping estimates at $1.15 billion. Platform revenue, which is made up primarily of advertising and subscription fees, jumped 25% to $1.04 billion, a strong indicator of momentum in the business.
The company also did a better job of monetizing its users as average revenue per user rose 4% to $41.49 in the quarter. Growing that figure will be key to its future success, since it's already signed up half of the broadband households in the United States.
On the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 62% to $77.5 million. Looking ahead, Roku's guidance for 2025 called for revenue of $4.61 billion, up 12% from 2024, and it expects adjusted EBITDA of $350 million, up from $260 million in the quarter. It also said it expects positive operating income in 2026.
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Turning the corner
Roku's value proposition has long confused some investors, but it's not as complicated as it seems.
It loses money selling its devices so it can make money through advertising and partner subscriptions that it sells on its platform. The company ultimately makes money on engagement, and in the fourth quarter, a number of initiatives it's long touted started to pay off.
One area it's capitalizing on is its home page. That might sound insignificant, but it's the gateway to TV for more than 125 million people, making it valuable space for advertising and anything Roku wants to promote. It added a new AI-powered content row on the top of the home screen to recommend content, and it's integrated sports content throughout the home page, helping to drive consumption of sports.
The Roku Channel is also experiencing strong growth with streaming hours up 82%. That's important because it gives the company a large set of advertising inventory that it wholly owns. The more Roku Channel consumption grows, the greater the company's ability to monetize it is. In the fourth quarter, it added a new partnership with the NBA G League and also launched integrated ad campaign with Coca-Cola and PepsiCo.
Finally, it added premium subscriptions for a number of services, including Max, allowing users to subscribe in the Roku app, driving strong growth in distribution revenue.
The company is expanding its retail partnerships as well. For example, it's partnered with Instacart to guide users to buy packaged food and beverages featured on ads through Instacart.
NASDAQ: ROKU
Key Data Points
What's next for Roku
Roku still has a long growth runway in front of it, and a lot of opportunities to monetize it.
The company has the No. 1 streaming app in the U.S., Canada, and Mexico, and it's growing across Latin America as well. Management said it will stop reporting numbers on streaming households and hours each quarter, so investors will have to sharpen their focus on the financial numbers instead.
In addition, the headwinds across the streaming sector finally seem to be lifting as the long post-pandemic hangover fades.
After bemoaning headwinds in the media and entertainment (M&E) vertical in earlier quarters, the company has diversified its mix of advertisers to mitigate that risk, but it also said that M&E is healthier and expected to grow in 2025.
Overall, Roku is growing where it needs to grow, and many of its earlier challenges seem to have faded away. It's given investors an operating profit target, and it still has a large addressable market to penetrate.
If the company can maintain the momentum from the fourth quarter, 2025 could be a big year for the streaming distribution leader.
