Is Roku Stock a Buy as Ad and Subscription Revenues Climb?

Whether Roku (NASDAQ: ROKU) has been a good past investment largely comes down to timing and perspective. The stock has more than doubled over the past year, but it's down around 60% over the past five years. However, after reporting solid fiscal Q2 results after the bell on April 30, the stock is seeing strong momentum.

Let's take a closer look at its results and prospects to see whether Roku's stock can continue its momentum.

Strong ad and subscription revenue growth

Despite Roku's association with its streaming devices, these devices essentially serve as loss leaders and are a gateway to its streaming operating system, where its real business is selling advertising and streaming subscriptions.

For Q1, Roku's platform revenue surged 28% to $1.13 billion. Ad revenue climbed 27% to $612.7 million, while subscription revenue jumped 30% to $518.5 million. Ad revenue was boosted by big events like the Winter Olympics and Super Bowl, while its subscription business was powered by the additions of partners like Apple TV and Peacock.

Notably, the company's advertising gross margins hit a new high of 60.5%, up 450 basis points year over year, helped by the release of higher-margin ad solutions, like video home screen ads. However, its subscription gross margins fell by 760 basis points to 41.1%, hurt by a change in its mix of business, with premium channels carrying lower gross margins.

Device revenue sank by 16% to $117.6 million. However, its device gross loss improved slightly from a loss of $19.3 million to a loss of $19.1 million.

Total revenue rose 28% year over year to $1.25 billion, while its earnings per share (EPS) came in at $0.57, compared to a loss of $0.19 a year ago. That topped analyst expectations for a profit of $0.33 per share on $1.2 billion in revenue.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 165% year over year to $148.4 million, above its $130 million guidance. Notably, Roku's adjusted EBITDA excludes stock-based compensation (SBC), which totaled $78.7 million in the quarter.

Looking ahead, Roku projected Q2 platform to climb 20% and upped its full-year platform revenue guidance by $110 million to $5 billion, representing 21% growth.

Image source: The Motley Fool.

Can Roku's momentum continue?

Roku has an attractive business model that is gaining momentum. It's really ingrained itself as an important part of the streaming ecosystem and is doing a nice job driving ad and subscription revenue.

I personally don't find the stock attractive from a valuation perspective. It trades at a forward P/E of 52.5 times and an enterprise value (EV)-to-EBITDA multiple of about 24 times 2026 analyst estimates. Meanwhile, I view its heavy use of SBC as a negative, as it's been buying back stock in an effort to try to keep its dilution in check.

However, I've found that SBC is generally only scrutinized when stock prices are going down, not on the way up, so despite some of my misgivings, I do think the stock can continue to climb higher this year.

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