Roku stock has been on a roll lately, rising about 10% over the past five trading days. The stock is also up about 14% since the company released its second-quarter 2024 results earlier this month. So what trends are driving Roku higher?

Roku’s results for last quarter were better than expected, with revenue up 14% year-over-year to $968 million and operating loss narrowing to $71 million. Key operating metrics were also strong, with streaming hours up 20% and total accounts for the platform business – Roku’s cash cow, which sells ads and content – growing 14%. Device sales have also picked up, up 39% year-over-year, ensuring that Roku’s installed base, which is critical for attracting customers to the platform business, continues to grow. The Roku Channel, the company’s own streaming offering, has seen an increase in engagement, with streaming hours up nearly 75% year-over-year and the offering becoming one of the most popular free, ad-supported streaming offerings in the U.S. This channel is expected to drive higher-margin advertising revenue over the long term. In addition to the strong results, investors are also likely seeing higher value in Roku, as the stock is still down over 30% year-to-date, despite the company posting relatively strong earnings over the past two quarters.

Now, looking at a slightly longer time period, ROKU stock has suffered a sharp 80% decline from $330 in early January 2021 to around $65 now, while the S&P 500 has risen by about 50% over that roughly 3-year period. However, ROKU stock’s decline has been far from consistent. The stock’s returns were -31% in 2021, -82% in 2022, and 125% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023 – suggesting that ROKU lagged behind the S&P in 2021 and 2022.

Actually, consistently beats the S&P 500 – for better or for worse – has been difficult for individual stocks in recent years; for heavyweights in the communications services sector such as GOOG, META and NFLX and even for mega-cap stars TSLA, MSFT and AMZN. In contrast, the Trefis High Quality Portfolio with a collection of 30 stocks outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ portfolio stocks delivered better returns with less risk compared to the benchmark index; the ride was less of a rollercoaster, as shown by the HQ portfolio’s performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ROKU face a similar situation to that seen in 2021 and 2022 and perform worse than the S&P in the next 12 months – or will there be a recovery?

Overall, we believe the risk-reward ratio for Roku stock remains very positive at the current market price of about $63 per share. The stock trades at just over 2x estimated 2024 revenue, well below levels of over 30x the 2021 peak. The metric falls below 2x if we exclude Roku’s sizable cash position of about $2 billion. Growth is also likely to continue as the long-term trend of advertising dollars shifting from linear TV to digital video formats should benefit Roku in the long run. Roku could also become more competitive with its programmatic advertising after it signed a new partnership with The Trade Desk, the largest independent demand platform. Roku has also made some progress in controlling costs in recent quarters. For example, the company reported a 2% year-over-year decrease in total operating expenses in the second quarter, reflecting the workforce and office space reductions implemented in 2023. Roku is also generating more cash. Free cash flow was $318 million in the quarter, compared to negative figures in the year-ago quarter. This brings the company’s year-to-date cash flow to over $740 million. We value Roku stock at about $67, which is about 7% above the current market price. See our analysis on Roku Review: Expensive or cheap for more details on the factors affecting our price estimate for the stock.

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