Roku (ROKU) stock soared as much as 30% in midday trading on Thursday after the company reported strong fourth quarter guidance and pointed to further signs of recovery in its ad revenue.
Roku guided to adjusted EBITDA of $10 million in the fourth quarter, compared to an expected loss of $57.6 million, according to consensus estimates compiled by Bloomberg. It also expects fourth quarter revenue of roughly $955 million, above Wall Street estimates, while total gross profit is expected to total about $405 million.
The company, which has enacted a slew of cost-cutting measures including layoffs in an effort to bring down operating expenses, said it remains committed to positive adjusted EBITDA for full-year 2024, "with continued improvements after that."
Roku reported third quarter net revenue of $912 million, up 20% year over year, on a net loss of $330.1 million, or $2.33 a share. That net loss was wider than the prior-year period's $122.2 million loss.
Platform revenue, which includes ad sales, revenue from distribution deals, and the over-the-top streaming service The Roku Channel, came in at $744 million — up 18% on the year after declining 1.5% in the first quarter and growing 11% in Q2.
The boom was driven by strength in both content distribution and a solid rebound in video advertising.
"In Q3, the year-over-year growth of video advertising on the Roku platform outperformed both the overall ad market and the linear TV ad market in the US," Roku said, adding the the company "saw continued signs of a rebound" despite the weak macro environment.
Roku said overall US ad spend on traditional linear TV was down 12% year over year, while traditional TV ad scatter, or the ad inventory not purchased at the Upfronts, sank 27% compared to 2022, citing data from the Standard Media Index (SMI).
Setting up 'an acceleration'
Brand advertising on the Roku platform saw increased spending across categories like health and wellness and consumer packaged goods. Media and entertainment (M&E) remained weak amid the ongoing actors strike and since-concluded writers strike, with management warning M&E will be a "challenge" in the fourth quarter.
Analysts, however, expect that category to bounce back and accelerate growth by next year.
"Media and entertainment (M&E) is softer [but] video ad trends were favorable in Q3 and seem OK for Q4. Since M&E is likely to return in 2024, this sets up an acceleration," Wells Fargo analyst Steve Cahall wrote in reaction to the report.
Cahall maintained his Equal Weight rating but upped his price target to $77 a share from the prior $70.
Bank of America analyst Ruplu Bhattacharya added, "Roku's scale makes it an attractive platform for advertisers who will, over time, shift their dollars to connected TV. Roku continues to benefit from a cyclical recovery in advertising."
"The ongoing Hollywood strike continues to limit content and negatively impact M&E spend," Bhattacharya continued, adding Roku will likely diversify its spending in the meantime. "While today, media companies are controlling their marketing budgets they still need to spend to drive acquisition, retention and to control churn, so we do expect M&E spend to eventually return."
The analyst reiterated his Buy rating and price target of $93 a share.
Oppenheimer analyst Jason Helfstein predicted Roku will remain the market leader in the connected TV market, explaining the company can leverage its advantages in pricing and merchandising.
"Roku should benefit from the secular trend of advertising dollars leaving linear TV in favor of over-the-top (OTT) platforms," he said. "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."
Helfstein lowered his price target to $100 from $110, but maintained his Outperform rating on the better-than-expected platform revenue results.
Roku added 2.3 million active accounts in the quarter to reach 75.8 million, a 16% year-over-year increase. Still, growth in average revenue per user, or ARPU, was negative at $41.03, down 7% year over year but up 1% on a sequential basis.
Streaming hours came in at 26.7 billion, up 4.9 billion hours compared to the prior-year period.
"Fundamentals are strengthening," Macquarie analyst Tim Nollen, who maintained his Outperform rating and $93 price target, said.
He added further catalysts like the eventual end of the actors strike and improvements in digital ad trends will strength the bull case. He expects traction on device sales and connected TV ads will also boost the share price over the medium-term.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].
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