Roku’s Stock Surge: Will Q3 Earnings Continue the Trend?

Roku (NASDAQ:ROKU) has experienced a notable rise in its stock price, with an increase of about 50% since early August. In contrast, the streaming giant Netflix (NASDAQ:NFLX) has seen a gain of nearly 29% during the same timeframe. As Roku prepares to announce its Q3 2024 earnings later this month, expectations suggest positive developments for the company. Analysts forecast revenue to reach approximately $1.03 billion, reflecting a 13% year-over-year increase. Additionally, net losses are projected to narrow to about $0.30 per share, outperforming market estimates. For insights into the trends expected to shape Roku’s third quarter results, see our analysis of Roku Earnings Preview.

Roku’s operational and financial performance is on the upswing. In Q2, Roku recorded a 14% year-over-year revenue increase, totaling $968 million, while operating losses decreased to $71 million. Key performance metrics also showed improvement: streaming hours surged by 20%, total platform accounts grew by 14%, and device sales soared by 39%, expanding Roku’s user base. The Roku Channel, the company’s own streaming service, has seen remarkable engagement, with streaming hours rising nearly 75% year-over-year, establishing it as one of the leading free, ad-supported streaming options in the U.S. This trend is likely to contribute to higher-margin advertising revenue in the future.

However, Roku faces challenges, particularly in revenue growth per user within its platform business, which is mitigating gains due to increased sales in international markets. Additionally, competition in the advertising space is intense. The average revenue per user (ARPU) stood at $40.68 for the last quarter, remaining relatively stable compared to the previous year. Investors will be paying close attention to Roku’s cost management and cash flows for this quarter, especially after a strong showing in Q2, where total operating expenses fell by 2% year-over-year due to workforce and office space reductions initiated in 2023. The company also reported free cash flow of $318 million for Q2, up from negative values in the same quarter last year. For insights on how Roku’s stock could reach $200, refer to our detailed analysis.

The performance of ROKU stock over the last four years has been markedly inconsistent, with annual returns fluctuating more dramatically than the S&P 500. The stock recorded returns of -31% in 2021, -82% in 2022, and an impressive 125% in 2023. In comparison, the Trefis High Quality (HQ) Portfolio, which consists of 30 stocks, has demonstrated significantly less volatility and has consistently outperformed the S&P 500 across the same period. This leading performance can be attributed to the HQ Portfolio’s stocks delivering favorable returns with lower risks, avoiding the wild fluctuations typical of ROKU’s performance. Given the uncertain macroeconomic climate—including potential rate cuts and geopolitical tensions—many investors are wondering whether ROKU might face challenges similar to those seen in 2021 and 2022, potentially underperforming the S&P over the next year, or if it will rebound instead.

Currently, Roku stock is priced at just over 2.5 times its estimated 2024 revenue, a stark contrast to the double-digit multiples seen in 2021. Nevertheless, the company is confronting obstacles. Roku’s streaming service distribution business, which helps digital platforms by managing subscriptions and earning commissions, has been feeling headwinds as more streaming services, including Netflix, pivot towards more affordable, ad-supported plans due to consumer demand for better pricing in a challenging economy. Additionally, Roku is increasingly vying for advertising revenues against major tech competitors like Netflix, Meta, and Alphabet. Our valuation for Roku stock stands at about $67, which is 13% below the current market price. We intend to revisit our price estimate following the release of Q3 earnings. For more insight into the factors influencing our price estimate, see our analysis on Roku Valuation: Expensive or Cheap.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.