Roku Shares Plunge. Is This a Red Flag or Time to Buy the Dip? | The Motley Fool

Roku (ROKU -2.48%) shares plunged following the company’s Q2 earnings report, despite solid results that surpassed analyst estimates. The stock is now trading at a similar level to where it was in August of 2022, and it has been cut in half over the past five years.

While the company does face some tariff headwinds for its devices, its main business is its platform business. Its devices are essentially just a way to get its streaming operating system onto TVs and into households. From there, it generates revenue by getting a cut of the subscription price, or advertising slots for ad-supported services, when people sign up for a service through its platform. In a way, it is similar to the Apple App Store. It also gets ad revenue through its own streaming channel and advertising on its home page.

Let’s dig into the company’s recent results and guidance to see if the dip is a buying opportunity or a red flag.

Solid quarter and increased guidance

Much of Roku’s struggle over the past few years has been due to its lack of profitability. And while that is still the case, the company is expecting to become operating income positive in Q4, which is much earlier than it expected. Meanwhile, it is looking for further earnings before interest, taxes, depreciation, and amortization (EBITDA) margin improvements next year.

Ultimately, the company thinks that by growing platform revenue, it will improve its profitability picture. On this front, it is looking to grow in a few ways. With regard to subscriptions, it is using its home screen to make show and channel recommendations and to offer bundles to help drive the number of signups coming from its platform. Meanwhile, it said that its Roku Ads Manager is starting to attract performance-based advertisers that have traditionally only advertised on social media. It is also looking to deepen its integration with traditional Demand-Side Platforms (DSPs) like Amazon and Trade Desk.

The company also continues to push its own Roku Channel, while it is integrating its acquisition of Frndly TV into its platform. Frndly offers 50+ budget-friendly live TV channels (such as Hallmark, Lifetime, etc.) with plans starting at around $7 a month. It’s a cheap way for people to get many of their favorite cable channels. This should help with its ad sales and DSP partnerships.

For Q2, Roku saw revenue rise 15% year over year to $1.1 billion. That was solidly ahead of the $1 billion analyst consensus, as compiled by FactSet. EPS of $0.07, meanwhile, was well ahead of the $0.15 loss expected by analysts, although that was largely driven by net operating income.

Platform revenue climbed 15% to $975.5 million, while device revenue sank 6% to $135.6 million. The growth was led by video advertising. Platform gross margins fell 240 basis points in the quarter, while platform gross profits climbed 13% to $497.7 million.

Device revenue fell by 6% to $135.6 million. Device gross profits were $0.

Adjusted EBITDA surged 79% year over year to $78.2 million, well above its $70 million guidance. Notably, Roku’s adjusted EBITDA excludes stock-based compensation, which totaled $84.6 million. While stock compensation isn’t a cash outlay, it’s a real expense, as it dilutes shareholders through increasing the share count.

Source: Roku quarterly report

Looking ahead, Roku forecasts 2025 revenue to be around $4.65 billion. It upped its platform revenue forecast to $4.075 billion, from $3.95 billion, representing growth of 16%. It now expects adjusted EBITDA of $375 million and net income of $30 million, compared to an earlier outlook of $350 million in adjusted EBITDA and a net income loss of $30 million.

For the third quarter, it is projecting revenue of $1.2 billion, a 13% year-over-year increase. It is looking for adjusted EBITDA of $110 million and net income of $10 million. It expects platform revenue to grow 16%.

Should investors buy the dip?

Roku continues to generate strong revenue growth and is beginning to move toward operating income profitability. It’s working on a few different ways to continue to drive momentum in its ad business, while trying to reinvigorate subscription growth. The company has a history of being conservative with guidance, so I’d expect it to continue to post solid results throughout the rest of the year.

From a valuation perspective, Roku trades at an enterprise value (EV)-to-EBITDA multiple of about 25 times 2025 analyst estimates. That’s not outrageous for a stock that is solidly growing its revenue and moving toward net income profitability. As such, I think more aggressive investors can look to buy the dip.