Roku Stock Soars 30% As Q3 Earnings Beat Expectations, Company Points To Ad Revenue Rebound

Roku Inc.’s stock saw a massive rally on Thursday, surging as much as 30% during intraday trading after the company’s third quarter earnings report beat Wall Street’s expectations.

Roku also provided an optimistic fourth quarter outlook, with guidance suggesting a rebound in advertising revenue despite ongoing macroeconomic headwinds.

The streaming platform company reported adjusted EBITDA of $10 million for Q4, dramatically exceeded analysts’ consensus estimate for a $57.6 million loss, according to data compiled by Bloomberg.

Roku said it expects total fourth quarter revenue of approximately $955 million, topping estimates, while total gross profit is projected around $405 million.

Cost Cutting Measures Paying Off As Roku Remains Committed To 2024 Profitability

Roku has taken aggressive steps this year to reduce operating costs, including workforce reductions, in an effort to reach sustainable profitability.

The company stated it remains firmly committed to achieving positive adjusted EBITDA for full-year 2024, “with continued improvements after that.”

The streamer has endured a turbulent 2022, with its shares down over 65% year-to-date through Wednesday’s close. However, Roku’s better-than-feared Q3 results and optimistic guidance appear to have renewed investor confidence.

Q3 Revenue Hits $912M As Key Business Segments Show Resilience

For the third quarter, Roku reported net revenue of $912 million, a 20% increase compared to the same period last year. However, the company posted a larger net loss of $330.1 million, or $2.33 per share, versus a $122.2 million net loss in Q3 2021.

Roku’s Platform segment, which includes advertising, content distribution and its owned and operated Roku Channel service, saw revenue climb 18% year-over-year to $744 million.

This growth comes after Platform revenue declined 1.5% in Q1 2022 and rose 11% in Q2, indicating stabilization and reacceleration.

Ad Revenue Rebound Provides Tailwind As Roku Outperforms Broader Market

A key factor driving Roku’s platform growth was strength in video advertising revenue amid signs of recovery following months of pandemic-related pullbacks.

Roku said year-over-year growth for video ads on its platform notably outpaced both the total U.S. ad market and the linear TV ad market.

Overall U.S. ad spend on traditional linear TV sank 12% versus last year, while prices for TV ad inventory purchased outside of Upfronts deals cratered 27%, per Standard Media Index data cited by Roku.

This divergence highlights advertisers’ ongoing shift of budgets away from legacy TV platforms and toward digital streaming.

Roku said it saw expanded ad spending across categories like health/wellness and consumer packaged goods. Ad sales in the media/entertainment category remained soft due to industry strikes, which management expects will continue posing a “challenge” through Q4.

Financial Analysts Upbeat On Roku’s Long-Term Positioning

Following the results, several Wall Street analysts expressed optimism regarding Roku’s ability to maintain leadership in the rapidly growing connected TV market. While near-term hurdles persist, analysts see multiple catalysts emerging in 2023/2024.

“Roku should benefit from the secular trend of advertising dollars leaving linear TV in favor of over-the-top (OTT) platforms,” said Oppenheimer’s Jason Helfstein.

“Roku is leveraging its 1P content channel, The Roku Channel, to drive favorable economics, as well as a large pool of OTT advertising spend occurring outside of the Roku platform.”

Bank of America’s Ruplu Bhattacharya noted Roku’s massive scale makes it highly attractive for advertisers shifting budgets away from legacy platforms. While media/entertainment spend remains depressed currently, Bhattacharya believes these advertisers will eventually have to ramp up again.

Macquarie analyst Tim Nollen sees strengthening fundamentals and several positive catalysts boosting Roku over the medium-term, including end of industry strikes, further improvements in digital ad trends, and traction in device sales and connected TV ad market share gains.

Active Accounts, Streaming Hours Continue Steady Growth

In Q3, Roku added 2.3 million incremental active accounts, ending the quarter with 75.8 million, a 16% year-over-year increase. However, average revenue per user (ARPU) declined 7% versus last year to $41.03, reflecting ongoing economic challenges.

Streaming hours rose 4.9 billion hours over Q3 2021 to 26.7 billion, highlighting continued user engagement growth.

While pressures remain in the near-term, Roku continues making strategic progress in expanding its connected TV platform and growing its base of cord-cutting streaming customers.

As economic and industry headwinds abate over the coming year, analysts see the company well-positioned to reaccelerate revenue growth in 2024 and beyond. For now, investors appear reassured by early signs of stabilization in Q3 results.