Roku Plunges on Guidance. Is the Stock a Buy on the Dip?

After trading above $470 per share back in 2021, Roku (NASDAQ: ROKU) stock eventually lost over 90% of its value, and it has continued to struggle to reignite investor enthusiasm. And things got worse last week after the stock plunged following the streaming platform's third-quarter results.

The latest sell-off has left its shares down 25% year to date. Let's take a closer look at the company's report to see if this is a buying opportunity or if investors should stay away.

Good quarter, poor guidance

Despite the market reaction, Roku's third quarter was actually quite good. Revenue climbed 16% year over year to $1.06 billion, topping $1 billion for the first time and coming in above management's $1.01 billion outlook.

Roku credited the growth to improved ad demand, better home screen monetization, and deeper third-party platform integrations. Management said it saw strong growth in the political, retail, and CPG (consumer products goods) verticals, while media and entertainment remained weak.

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) surged 126% year over yearto $98.2 million, well ahead of the $45 million from guidance.

However, Roku's adjusted EBITDA excludes stock-based compensation, which added up to $100.1 million last quarter, or enough to wipe out the company's adjusted EBITDA profit entirely. That expense is the main reason Roku is still reporting an operating loss every quarter.

Platform revenue jumped 15% to $908.2 million, and it added 1.9 million new user households in the quarter. That brought its total user households to 85.5 million, a 13% increase from a year ago.

The company is known for its streaming devices, but they're just the lure to bring users onto its platform, where it then makes money in a variety of ways. This includes getting a cut of subscription revenue or advertising slots for viewers, as well as advertising on its home page or through its own streaming channel.

Average revenue per user (ARPU) was flat last quarter at $41.10. This metric has stagnated since the end of 2021, when it was $41.03. But platform gross margins rose 610 basis points in the quarter, while platform gross profits climbed 30% to $498.1 million.

Device revenue rose 23% to $154.0 million, although this equipment is sold at a loss, resulting in negative gross profit of $11.7 million.

Roku also did a nice job lowering operating expenses in the quarter, reducing them by 28% year over year.

The company's forecast calls for fourth-quarter revenue of $1.14 billion, which would represent growth of 16%. Management's guidance also includes gross profit of $465 million and adjusted EBITDA of $30 million.

A year ago, its gross profit was $437.9 million, while it had adjusted EBITDA of $47.4 million. Analysts were looking for gross profit of $477 million and EBITDA of $36.2 million.

Management said it expects strong growth in 2025 despite some headwinds such as lapping price increases and a lack of political advertising next year. However, investors were unhappy the company said it would stop reporting household figures starting next year, including number of streaming households and ARPU.

Image source: Getty Images

Time to buy the dip?

While Roku is still growing nicely, there are issues investors need to be aware of. The company has not been able to grow its ARPU since the end of 2021, and going forward, it will stop reporting the metric entirely.

At the same, the company is still an aggressive user of stock-based compensation, which is a real expense that dilutes shareholders and increases the share count. This will continue to be a drag on the stock.

Data by YCharts.

In 2025, the company will face a headwind without the heavy political ad spending of a major election year. Linear TV historically sees a pretty big year-over-year decline after the election cycle, and there could be a similar trend in streaming advertising.

The media and entertainment categories, which were the company's bread and butter at one point, are also unlikely to return to their glory days as the industry focuses on profitability over subscriber growth.

Roku tends to be pretty conservative with guidance, so it can outperform its fourth-quarter projections. But then, there's 2025 guidance to worry about given management's conservative approach and the headwinds outlined above. As such, I'd stay on the sidelines for now.

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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.