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Roku (NASDAQ:ROKU) has had a tough year so far, falling by about 34% year-to-date, underperforming the Nasdaq-100, which gained over 20% over the same period. This compares with streaming titan Netflix (NASDAQ:NFLX), which has seen its stock rise close to 40% over the same period. Now Roku is poised to report its Q2 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 $940 million for Q2, up about 21% compared to last year, while net losses are expected to narrow to about $0.40 per share. See our analysis of Roku Earnings Preview for some of the trends that are likely to drive Roku’s results for the quarter.

Roku is likely to see continued growth in its platform business, led by a higher number of active users. For Q1 2024, Roku’s total revenue rose 19% to $881 million, and gross profit rose 18% year-over-year to $394.4 million. Roku had 81.6 million active accounts globally as of the end of Q1 2024, up from 71.6 million at the end of Q1 2023. Engagement rates on Roku’s platforms have also been trending higher. The company saw total streaming hours rise by 23% year-over-year during the last quarter, outpacing growth in total accounts. The Roku channel saw hours streamed rise by 66% year-over-year. This is helping Roku 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. Moreover, Roku’s streaming service distribution business is seeing weaker commissions as more streaming services, including Netflix, focus on selling more affordable, ad-supported plans. Heightened competition in the advertising markets could also be hurting the company. ARPU stood at $40.60 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 Q1 the company saw total operating expenses fall by 16% year-over-year, driven by workforce and office space reductions in 2023. Free cash flow stood at $426.7 million for Q1, up from $175 million in the previous quarter and from negative levels in the year-ago quarter.

Looking over a longer period, ROKU stock has suffered a sharp decline of 80% from levels of $330 in early January 2021 to around $60 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the decrease in ROKU stock has been far from consistent. Returns for the stock were -31% in 2021, -82% in 2022, and 125% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ROKU underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the mega-cap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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 with high oil prices and elevated interest rates, 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?

Overall, we believe that the risk-to-reward trade-off for Roku stock remains very positive at the current market price of about $61 per share. The stock trades at just about 2x forward revenue, which is considerably below levels of over 30x that it traded at its peak in 2021. The secular trend of ad dollars shifting away from linear television to digital video formats is likely to benefit Roku in the long run, while the improving cash flows are also likely to help the company’s valuation. We value Roku stock at about $70, which is 15% ahead of the current market price. See our analysis of Roku Valuation for more details on what’s driving our price estimate for Roku.

[1] Returns as of 7/12/2024
[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.