After trading above $470 per share in 2021, roku (ROKU 4.25%) The stock ultimately lost more than 90% of its value and has continued to struggle to rekindle investor enthusiasm. And things got worse last week after the stock plummeted following the streaming platform’s third-quarter results.

The latest sell-off has left its shares down 25% so far this year. 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, bad orientation

Despite the market reaction, Roku’s third quarter was quite good. Revenue rose 16% year over year to $1.06 billion, surpassing $1 billion for the first time and beating management’s $1.01 billion outlook.

Roku attributed the growth to better advertising demand, better home screen monetization, and greater integration of third-party platforms. Management said it saw strong growth in the political, retail and CPG (consumer goods) verticals, while media and entertainment remained weak.

Balanced EBITDA (earnings before interest, taxes, depreciation and amortization) rose 126% year over year to $98.2 million, well above the $45 million guidance.

However, Roku’s adjusted EBITDA excludes stock-based compensationwhich totaled $100.1 million last quarter, or enough to completely wipe out the company’s adjusted EBITDA profit. That expense is the main reason Roku still reports an operating loss every quarter.

The platform’s revenue increased 15% to $908.2 million and added 1.9 million new user households in the quarter. That brought the total number of user households to 85.5 million, an increase of 13% from the previous year.

The company is known for its streaming devices, but they are just the lure to attract users to its platform, where it then makes money in various ways. This includes earning a share of subscription revenue or ad space for viewers, as well as advertising on your homepage or through your own streaming channel.

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

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

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

The company’s forecast foresees revenue for the fourth quarter of $1.14 billion, which would represent a 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 an adjusted EBITDA of $47.4 million. Analysts expected gross profit of $477 million and EBITDA of $36.2 million.

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

Image source: Getty Images

Is it time to buy the dip?

While Roku continues to grow well, there are issues investors should keep in mind. The company has not been able to increase its ARPU since late 2021 and will stop reporting the metric altogether in the future.

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

Data by Y Charts.

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

The media and entertainment categories, once the company’s bread and butter, are also unlikely to return to their glory days as the industry focuses on profitability over subscriber growth.

Roku tends to be fairly conservative with guidance, so it may beat its fourth-quarter projections. But there is also the forecast for 2025 to worry about, given the conservative management approach and headwinds described above. Therefore, for now I will stay out of it.