Will Roku’s Q3 Results Justify Stock’s 50% Surge?

Roku (NASDAQ:ROKU) has fared well over the last few months, rising by about 50% since early August. This compares with streaming titan Netflix (NASDAQ:NFLX), which has seen its stock rise close to 29% over the same period. Now Roku is poised to report its Q3 2024 results later this month and we do expect things to get a bit better for the company. We expect revenue to come in at about $1.03 billion for the quarter, up about 13% compared to last year, while net losses are expected to narrow to about $0.30 per share beating estimates. See our analysis of Roku Earnings Preview for some of the trends that are likely to drive Roku’s results for the third quarter.

Roku’s operational and financial performance has been improving. Over Q2, Roku’s revenue was up 14% year-over-year to $968 million while operating losses were reduced to $71 million. Key metrics such as streaming hours (up 20%) and total platform accounts (up 14%) also strengthened, while device sales jumped 39%, helping to increase Roku’s installed base. The Roku Channel, the company’s proprietary streaming offering, has also gained in terms of engagement, with streaming hours up nearly 75% year-over-year with the offering emerging as one of the most popular free, ad-supported streaming offerings in the U.S. This is expected to drive higher-margin advertising revenue in the long run.

That said, Roku’s per-user revenue growth for its platform business has been easing due to increased sales from international markets.  Heightened competition in the advertising markets could also be hurting the company. ARPU stood at $40.68 for the last quarter, roughly flat compared to last year. We will be closely tracking Roku’s cost management and cash flows for the quarter, following the company’s strong recent progress. In Q2 the company saw total operating expenses fall by 2% year-over-year, driven by workforce and office space reductions in 2023. Free cash flow stood at $318 million for Q2, up from negative levels in the year-ago quarter. See a scenario on how Roku stock can hit $200

The decrease in ROKU stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -31% in 2021, -82% in 2022, and 125% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could ROKU face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

Roku stock trades at just a little over 2.5x estimated 2024 revenue, which is well below the double-digit multiples the stock traded at in 2021. That said, Roku faces challenges, too. Roku’s streaming service distribution business, which facilitates the subscription process for streaming services and earns commissions for the same, is seeing some headwinds as more streaming services, including Netflix, focus on selling more affordable, ad-supported plans as customers look for better value in a mixed economic environment.  Moreover, Roku has to increasingly compete for advertising-related revenue with big technology players including Netflix, Meta, and Alphabet in the video market. We value Roku stock at about $67, which 13% below the current market price. We will be revisiting our price estimate for the stock post Q3 earnings. See our analysis on Roku Valuation: Expensive or Cheap for more details on what’s driving our price estimate for the stock.

[1] Returns as of 10/22/2024
[2] Cumulative total returns since the end of 2016

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