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Roku (NASDAQ: ROKU) is on many growth stock investors’ radars following its 100% surge in 2023 through early September. That rally has trounced the 18% gains of the S&P 500 and roughly doubled the returns that streaming giant Netflix (NASDAQ: NFLX) has seen year to date.

Blindly chasing high returns is not a sound investing strategy, however. Shareholders are better off examining what makes a business stand out from other investment prospects. With that goal in mind, let’s look at a few unique factors that will drive returns for Roku stock going forward.

Accelerating growth

The main catalyst for Roku’s rally in 2023 has been a surprising rebound in its core advertising business. After rising just 1% in fiscal Q1, sales trends accelerated to an 11% increase in Q2. Roku is projecting another improvement in the current quarter as revenue growth speeds up to greater than 20%.

Advertising demand is volatile, though, and that’s why smart investors know to follow Roku’s engagement metrics for a clearer view of its growth potential. The news is positive on this front, with active streaming accounts climbing by 2 million to hit 74 million last quarter. Streaming hours also jumped 21% through late June to cross 25 billion.

Boosting engagement is the company’s surest path toward expanding its business over the long term, independent of those quarter-to-quarter shifts in the advertising industry.

Branching out

At the same time, Roku is doing its best to become less dependent on TV advertising demand. That increased revenue diversity is coming from things like its sales of Roku-branded TVs, but also from innovations in its advertising model. The new partnership with Shopify, which allows for purchases directly from an ad, is a prime example of the type of new feature that can move the revenue needle while making the Roku platform more attractive to advertisers.

The company has struck similar partnerships with other large retailers in recent quarters, including Walmart and Best Buy. Again, I’m talking about shoppable ads that link retailers directly to a shopping experience on the streaming platform. These moves help Roku differentiate itself from both traditional pay-TV operators and other streaming services. And, crucially, they help the company monetize its growing pool of users.

Losses continue

The biggest knock against Roku stock is the fact that the business hasn’t yet demonstrated that it can generate consistent profits. Net losses have expanded over the last six months, in fact, to $301 million from $139 million a year earlier.

For context, Netflix is on pace to reach a nearly 20% operating profit margin this year thanks to the subscription fees flowing from its 240 million paying users. Roku and its ad-driven sales footprint is still struggling to return to positive territory on this score, although its recent layoff plan should help cut costs in 2023 and beyond.

ROKU Operating Margin (TTM) data by YCharts

If you believe in Roku’s rebound strategy, the stock might look like a bargain even after its 2023 rally. Shares are still far below the highs they set during the pandemic, after all, and the company is valued at about half the price-to-sales ratio of the industry leader, Netflix. Roku fills a different role in the streaming ecosystem than Netflix, but both companies face similar challenges in an identical consumer market.

Yet risk-averse investors will likely want to watch the streaming service stock for more concrete signs of a return to profitability over the next few quarters. But Roku could still deliver strong returns from here, so long as the business continues boosting the value of its platform to users, content owners, and advertisers.

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Demitri Kalogeropoulos has positions in Netflix and Shopify. The Motley Fool has positions in and recommends Best Buy, Netflix, Roku, Shopify, and Walmart. The Motley Fool has a disclosure policy.

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