Roku Shares Rocket Higher on Ad Revenue Strength. Is It Too Late to Buy the Stock?

After peaking in 2021 when its shares traded above $470, Roku (NASDAQ: ROKU) has struggled the past few years, as streaming platform customers turned their focus more toward profitability and away from rapid customer acquisition.

While Roku's known for its streaming devices, these devices are just used to bring users to its streaming operating system. From here, the company generates revenue through a revenue-share with streaming services when users sign up through its platform. Roku can get a piece of the subscription price, or advertising slots for ad-supported services. It also generates ad revenue through its own streaming channel and advertising on its home page.

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The stock got a nice lift after reporting its fourth-quarter guidance and is now up about 33% year to date as of this writing. Over the past year, it is up less than 10%.

Let's take a closer look at the company's recent results and guidance to see if the rally can continue.

Solid quarter and guidance

For Q4, Roku saw revenue jump 22% year over year to $1.2 billion. That was solidly ahead of its $1.14 billion outlook.

Political advertising helped drive the growth. The company also credited better use of its home screen and expanding third-party partnerships. Excluding political advertising, revenue growth would have been 19%.

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) soared 62% year over year to $77.5 million, well above its $30 million guidance. Notably, Roku's adjusted EBITDA excludes stock-based compensation, which totaled $101.5 million. While non-cash, stock compensation is a real expense that dilutes shareholders through increasing the share count. Roku currently has 145.9 million shares outstanding, up from 143.5 million a year ago. Those additional shares are worth around $240 million at today's prices.

Platform revenue climbed 25% to $1.04 billion, while it added 4.3 million new user households in the quarter. That brought its total user households to 89.8 million, a 12% increase from a year ago. Average revenue per user (ARPU) rose 4% to $41.49. Roku has struggled to grow its ARPU. This metric was $41.03 at the end of 2021, meaning its ARPU has grown just 1% over the past three years. The company no longer plans to report total households or ARPU moving forward.

Platform gross margins fell 120 basis points in the quarter, while platform gross profits rose 22% to $559.9 million.

Device revenue increased 7% to $165.7 million, although the company continues to sell its devices as loss leaders. This resulted in its equipment sales having a negative gross profit of $47.4 million. That was a big drop from the loss of $20.5 million it saw a year ago. The company said device revenue and gross margins were affected by excess inventory and competitive pricing pressures.

Source: Roku quarterly report

Looking ahead, Roku forecast 2025 revenue to be around $4.61 billion, which would represent 12% growth. Platform revenue is expected to increase by 12%, or 15% when excluding political advertising. It is looking for adjusted EBITDA of $350 million and a net income loss of $40 million. The company has a history of setting initial conservative guidance.

For the first quarter, it is projecting revenue of $1 billion, a 13% year-over-year increase, and adjusted EBITDA of $55 million, a 35% increase. It expects platform revenue to climb 16%.

Roku is pushing international expansion, with a focus on the Americas and the U.K. It said it is making strides in its monetization efforts in Canada.

It has also been launching new ad products and increasing its integration with third-party platforms. New innovations include Roku Data Cloud, which lets partners access, analyze, and leverage Roku's proprietary TV data; Roku Exchange, which is used to maximize the performance of advertiser campaigns; and Roku Ads Manager, a self-service platform for small and medium-sized businesses.

Image source: Getty Images.

Is Roku a buy?

Roku continues to grow nicely. While it has struggled to increase ARPU, it has done a good job of adding new users to its platform. Unfortunately, it will no longer report these metrics going forward, making the company more opaque. It also continues to be an aggressive user of stock-based compensation, which skews the adjusted EBITDA profitability metric that it prefers to use.

However, the company issued solid full-year guidance, which has been an issue for it the past few years. Given the headwind with political advertising and its conservative nature with guidance, this is a good sign that 2025 could be a solid year for the company. It has also launched a number of new adtech innovations that could help drive growth moving forward.

From a valuation perspective, Roku trades at an enterprise value (EV)-to-EBITDA multiple of about 35 times 2025 analyst estimates. That valuation is a bit high, especially when taking into account that it has nearly $385 million in stock-based compensation expenses last year that were excluded from its adjusted EBITDA metric.

ROKU EV to EBITDA (Forward) data by YCharts.

Overall, I think Roku is set up for a nice 2025 and that the stock should continue to rally. I'm not a fan of its aggressive stock comp and think this leads to low-quality EBITDA, but I've also been around long enough to know that investors tend to ignore stock comp during bull markets. As such, more aggressive investors can consider the stock even after the jump in its price.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.