October is off to a strong start for Roku (ROKU 0.40%) investors. Shares of the streaming video pioneer are trading north of $100 for the third consecutive day on Tuesday. It's a familiar but unfortunately fleeting experience.
Roku has proven mortal since the initial pandemic feeding frenzy sent the shares to an all-time high of $490 in early 2021. The shares would go on to pull back dramatically, but it hasn't dimmed the fight. This is the fourth year in a row that Roku revisits trading in the triple digits. It has failed to stay there at the end of the last three years.
It could be different this time. Momentum is on its side, but will the company stick the landing in 2025? Let's take a closer look at how Roku is doing, and why the latest dalliance above $100 can have staying power this time.
This is why we can't have nice things
The inability to enjoy the good times isn't limited to the stock's short-lived tenure in the triple digits. Roku has now moved lower the day after posting financial results in four of the last five quarters. It happened last time out, even with Roku beating expectations on both ends of the income statement, raising its guidance, and delivering its first quarterly profit in more than three years.
Roku was checking most of the boxes that growth stock investors like to see, even before what should've been a transformational second quarter this summer. Revenue growth has been in the double digits for more than two years. It's been generating nine-figure trailing free cash flow for almost as long.
The lack of positive earnings was holding Roku back, but that headwind is now a tailwind. Analysts see the bottom-line gains improving exponentially through the second half of this year and beyond.
What are the other knocks on Roku now that the red ink has been wiped clean? Naysayers argue that Roku is in a cutthroat market, competing with three of the world's most valuable companies with far greater financial resources. How is that playing out?
Like the other leading streaming services stocks, Roku is no longer publishing its active user count or its average revenue per user. It's still putting out usage metrics. Streaming hours on the platform have soared 17% over the past year.
Like the other consumer tech titans in this space, Roku sells its hardware at a loss, but gross margin was surprisingly flat in its latest quarter. More importantly, since its high-margin platform revenue now accounts for 88% of its revenue, it's OK to treat its devices business as a loss leader.
Image source: Getty Images.
The narrative is changing
Roku shares keep climbing the wall of worry. The stock has risen nearly 40% over the past year, even with the initially negative reactions to its financial updates. Reality is beating the knee-jerk reactions.
Roku hasn't just landed ahead of analyst profit targets over the past year -- it has demolished them. Roku's positive bottom-line surprises have been 25% to 144% better than Wall Street targets. It's using its scalability and desirable audience to its advantage, forging partnerships that will enhance its already strong position in the connected TV adverting market.
All the storm clouds aren't gone. Even the connected TV ad market will take a hit if the economy heads south. Its rivals with market caps in the trillions can decide to throw even more money at their fledgling streaming operating systems. It will take a couple more years of expanding profitability before Roku has a reasonable P/E ratio.
Roku will be just fine. With its healthy run of "beat and raise" quarterly performances mowing down the worrywarts, 2025 should be far different from 2022, 2023, and 2024. There is more than just something good to watch on TV. Roku has cracked the code, and now it's the one that can go afford to go channel surfing from the couch.
