Shares of Roku (ROKU 10.47%) are an early winner this week. Shares of the streaming TV pioneer were trading as much as 13% higher on Monday after joining forces with Amazon (AMZN 1.81%) to announce a new connected TV integration. Amazon DSP -- its programmatic demand-side ad-buying platform -- will allow the online giant's customers access to the largest connected TV footprint in the country.
Roku reaches roughly 80 million U.S. households, making up more than 80% of the country's total connected TV homes. Early tests of the integration are promising for all parties. The announcement points out that Amazon DSP advertisers using the new solution reached 40% more unique viewers with the same budget, while lowering the instances of the same person seeing the same video ad by almost 30%. Amazon connected TV advertisers are now benefiting from three times more value from their ad spend through this exclusive partnership.
Advertisers win by reaching a larger audience. Consumers win by seeing fewer repeat ads. Amazon and Roku win by taking a step up in the connected TV food chain. Is this the first of many catalysts that can make Roku a market darling again?
The shares are already rallying nearly 50% over the past year, but the stock is still more than 80% below its all-time high set four summers ago. It could be time to start believing in Roku stock again.
There's always something good on TV
There are a couple of good reasons for Roku falling out of favor since its peak coming out of the pandemic. The company behind North America's most popular operating system for smart TVs was briefly profitable four years ago. Average revenue per user (ARPU) consistently rocketed higher with every passing quarter at the time.
Roku's audience is still growing, but the same can't be said about its bottom line. It has rattled off 13 consecutive quarterly losses. ARPU ran into a rough patch a couple of years ago, but it started to rebound as 2024 played out.
Last year was generally solid for Roku, despite its inability to reconnect with growth investors. Net revenue growth accelerated to 18% for all of 2024. It beat analyst earnings targets in all four quarters. Free cash flow continued to improve after turning positive the year before.
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Roku stopped offering up its streaming households and ARPU metrics this year, but engagement continues to be healthy. The time spent streaming through Roku's hub -- one of the key metrics it keeps reporting -- rose 16% in its latest quarter. Top-line gains have been in the double digits for eight straight quarters. Losses have been narrowing, and Roku's guidance calls for a return to profitability in the second half of this year.
Investors were still disappointed with Roku's latest quarter. Its outlook proved problematic, beyond the expected return to positive net income. Roku is modeling an 11% year-over-year increase in revenue for the second quarter that ends in two weeks. It would be its weakest net revenue jump in two years. Roku's full-year revenue and gross profit guidance also was revised lower, mostly on the projected impact of tariffs for its smaller hardware business.
This week's Amazon deal is the wake-up that Roku investors needed. It's a reminder that the platform is trouncing much larger companies dabbling in the space of smart TV operating systems -- including Amazon's own Fire TV. Ad budgets will keep migrating to connected TV, reaching audiences that are harder to find in this golden age of streaming.
Amazon's suggestion that advertisers will get more bang for the same buck may imply Roku revenue may be unchanged, but that's not the case. More marketing missives will come Roku's way through Amazon, given the more compelling value proposition. Today's upticks may be not only sustainable, but the start of a larger rally in Roku's ascent.
