Roku (ROKU +2.37%) stock has struggled since the pandemic as the brief surge in demand for streaming proved to be more of a curse than a blessing for the leading streaming distribution platform.
The company ramped up spending and hiring before the pandemic ended, and has been trying to rightsize and streamline the business since then. That process took a big step forward on Thursday after the company reported an operating profit ahead of schedule and for the first time since 2021.
On a generally accepted accounting principles (GAAP) basis, the company reported an operating profit of $9.5 million, compared to a loss of $35.8 million in the quarter a year ago.
Overall growth was solid too, with platform revenue up 17% to $1.07 billion and total revenue up 14% to $1.21 billion, which matched estimates. Usage continued to grow steadily as well, with streaming hours up 14% year over year to 36.5 billion.
Gross margin narrowed in the quarter, a sign that direct costs are growing faster than revenue. However, the company was able to turn profitable by keeping operating expenses like research and development, and sales and marketing flat.
On the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $116.9 million, up 19% from the quarter a year ago, and GAAP earnings per share was $0.16, up from a per-share loss of $0.06.
Image source: Roku.
Roku gets back on track
Roku's efforts to expand integrations with demand-side platforms like Amazon and The Trade Desk are paying off as it's increasing ad demand and giving it a greater ability to serve advertisers. Its own ads manager, which serves small and medium-sized businesses, is also delivering solid growth.
It's also improving the ad product with better measurement tools and other features that help advertisers improve their campaigns and understand what's working.
Mastering the ad product will be key to Roku's continued growth as advertising is the source of a substantial portion of its revenue, if not a majority of it.
It's also making core improvements to the product, like launching its popular Sports Experience, which makes it easy for viewers to find sports content, in Mexico. It's also added AI capabilities to Roku Voice so that it can serve as an intelligent entertainment guide, rather than just receive commands. Roku also now gives users AI-generated "Why to Watch" summaries to help viewers find content.
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Key Data Points
Is Roku a buy?
The post-pandemic success of Netflix is a reminder that the streaming market is huge and still growing. Roku isn't a global company the way Netflix is, but it is the top streaming operating system in the U.S., Canada, and Mexico, and it is expanding elsewhere, like Latin America.
Additionally, while the business has struggled in recent years, usage growth has been solid. Roku stopped reporting quarterly user numbers, but it does reveal streaming hours, and that is still growing briskly, a good sign that it is adding new users and that existing users are engaging with the platform more.
The long path back to profitability has been frustrating for investors, but it's a good sign that Roku made it ahead of schedule, as it was previously targeting 2026 for a profit.
Management said that it was confident it would deliver double-digit platform revenue growth and improve operating margins in 2026 and beyond. For the fourth quarter, the company forecast 15% platform revenue growth and 12% total revenue growth. It also raised its full-year guidance to $4.11 billion in revenue and $395 million in adjusted EBITDA.
Roku is a difficult company to value. On a price-to-sales ratio, the stock is valued at a multiple under 4, which seems reasonable, especially for a company that remains the leading streaming distribution platform and has the ability to rapidly generate operating leverage if it can continue to hold operating expenses flat.
Roku is a risky stock, but it still has the potential to double or better from here. For growth investors, getting some exposure to Roku makes sense.
