Roku Stock Rises on Outlook. Is It Time to Buy the Stock?

Roku (NASDAQ: ROKU) shares plunged immediately after the company reported its Q3 earnings report, only to furiously rally after the market opened. After the roller coaster ride, the stock now finds itself up about 45% on the year, as of this writing.

Let's take a close look at the streaming company's results and outlook to see what investors should do with the stock.

Image source: Getty Images.

A strong quarter and upped guidance

While Roku is best known for its streaming devices, these devices are more of a loss-leader to get its streaming operating system into households. The company's primary business is similar to the Apple App Store, where it gets a piece of the subscription price when someone signs up for a streaming service through its platform. For ad-support networks, it gets ad slots, and it also generates revenue by serving ads on its own streaming channels and home page.

Roku recently acquired Frndly TV, which offers 50-plus, budget-friendly live TV channels (such as Hallmark, Lifetime, etc.) with plans starting at around $7 a month. It also recently launched Howdy, which costs $3 a month with no ads and includes 10,000 hours of movies and TV shows.

For Q3, Roku saw its revenue climb 14% year over year to $1.2 billion, which was in line with the analyst consensus, as compiled by FactSet. Meanwhile, it reported earnings per share (EPS) of $0.16, compared to a loss of $0.06 a year, topping analyst expectations for a profit of $0.06 per share.

Platform revenue jumped 15% to $1.06 billion. The growth was once again led by video advertising, and the company said that it is seeing increased ad demand as it integrates more closely with third-party demand‑side platforms (DSPs). It also said that it is seeing strong momentum with its Roku Ads Manager self-serve platform aimed at smaller advertisers. It added that subscriptions are doing well, particularly premium subscriptions, which it plans to launch more of next year.

Platform gross margins dropped 270 basis points in the quarter, which has been an ongoing theme given the shift more toward video advertising versus subscription sign-ups. Platform gross profits, meanwhile, climbed 11% to $547.8 million. Device revenue dropped by 5% to $146 million, while device gross profits were a loss of $22.9 million.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed 19% year over year to $116.9 million, above its $110 million guidance. Notably, Roku's adjusted EBITDA excludes stock-based compensation, which totaled $88 million in the quarter. Stock compensation is often excluded from adjusted EBITDA because it is a non-cash expense, but it dilutes shareholders by increasing the share count and is thus a real expense.

Below is a recap of the company's Q3 results.

Source: Roku quarterly report

Looking ahead, Roku upped its 2025 forecast. It now expects full-year revenue to be around $4.69 billion, up from an earlier outlook of $4.65 billion. Platform revenue is expected to increase by 17%. It now expects adjusted EBITDA of $375 million and net income of $50 million, compared to an earlier projection of $375 million in adjusted EBITDA and net income of $30 million.

For Q4, it has guided for revenue of $1.35 billion, a 12% year-over-year increase. It is looking for adjusted EBITDA of $145 million and net income of $40 million. It projects that platform revenue will grow by 15%.

Is Roku a buy?

Roku continues to produce strong revenue, and the company thinks it can significantly grow average revenue per user (ARPU) per account in the coming years due to all its "monetization initiatives." Ironically, the company stopped reporting ARPU because it had stopped growing.

While it continues to see some media and entertainment industry weakness, as streaming companies focus more on profitability over subscriber additions, the rest of its business is performing well. Meanwhile, its new integration with Amazon's DSP looks like a promising growth driver. More premium subscriptions and optimizing its home screen from ads are other potential growth drivers.

From a valuation perspective, Roku trades at an enterprise value (EV) -to-EBITDA multiple of about 34.5 times 2026 analyst estimates. Given that stock comp eats away at much of its EBITDA, I find its valuation to be a bit frothy. While I think the company has some nice drivers, that would keep me on the sidelines for now.

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