Like so many growth stocks, Roku (NASDAQ:ROKU) is a story stock. With profits still negative — and even Adjusted EBITDA barely positive — valuing ROKU stock is difficult from a fundamental perspective. Investors are trying to estimate profits not coming until 2025 — and 2035 — which leads to a healthy dose of the “garbage in, garbage out” modeling problem.

In this case, I like the story behind Roku. The company’s namesake players are becoming a central part of the growing streaming media ecosystem. And as I wrote back in March, efforts to grow The Roku Channel and expand into hardware added new dimensions to that story.

It appears that at least in part those new efforts drove the big gains in ROKU stock, which climbed 21% on Thursday after Q2 earnings the night before. Certainly, a headline beat — and a surprise profit — contributed as well. Short-covering no doubt added more fuel to the fire. But from a long-term perspective, Roku is setting itself up to have a bigger role in streaming going forward – and that seems like good news for ROKU stock.

The concern here is valuation. I liked ROKU at $37, but $57 is a bit of a different story. An 8x revenue multiple isn’t obscene in this market,  but ~40% of revenue still comes from the low-margin player segment. Volatility is likely to be high, and there’s a reasonable likelihood a better price may be on offer in the not-too-distant future. The story here supports a continued long position in ROKU stock. But price matters, too.

Q2 Earnings

There’s a lot to like in Roku’s Q2 report — and good reason for the big gains in ROKU stock. From a headline standpoint, the quarter looks spectacular. On the top line, revenue grew 57% to $157 million — a full 16 points of growth better than consensus. The Street was looking for an adjusted net loss of $0.15 per share, but Roku in fact posted a break-even quarter.

There was a modest bit of one-time help on the bottom line. An accrual for IP licensing liabilities was reversed, providing a ~$9 million benefit to gross profit. Still, that only accounts for roughly $0.09 of the beat, meaning even without the help, Roku’s numbers were better than expected.

Looking closer, the quarter still looks strong. Platform revenue nearly doubled, with a 96% increase. The number of accounts climbed 46% year-over-year, with hours watched up 57%, showing increased engagement. Video advertising revenue led ARPU (average revenue per user) to climb 48% year-over-year. Those revenues are coming from ads within the Roku interface, but mostly from ad-supported channels (which includes third-party offerings).

The player business performed reasonably well itself. Revenue rose 24% — with pricing actually up 2%. Roku had increased discounting of late — in part due to competition from Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL,GOOG) — but demand seems strong enough that it no longer has to fight purely on price.

Across the board, then, this looks like a very strong quarter from a fundamental perspective. And there’s good news from a qualitative standpoint as well.

An Expanding Business

In the ‘core’ Roku business, then, the news looks good. Roku is adding more users and competing well with giant rivals. It’s monetizing those users better as well, with ARPU doubled over the past two years, per the Q2 shareholder letter. That’s a nice combination, and one that leaves a long runway for growth going forward.

And there are external drivers coming as well. The Roku Channel was a big focus of the Q2 conference call, with the network now launched — for free — on web and mobile devices. Roku TV wireless speakers are augmenting the user experience, and a first step toward an integrated audio offering controlled through the Roku player. A deal with Samsung expands the production of Roku TVs, further driving user growth.

So there’s more here than just a simple hardware play, which was one of my concerns after the Roku IPO last year. And there’s enough to see growth continuing for quite some time.

The Valuation of ROKU Stock

The question, with ROKU up 300% from its IPO price of $14, and nearly 100% from early April lows, is how much is priced in. Again, ROKU does seem that expensive — at least in this market — at 8x revenue.

But that is a big multiple considering that about 40% of revenue comes from the player business and that business basically isn’t profitable. YTD, excluding the benefit from the accrual reversal, gross margin is about 12%. Player sales aren’t designed to drive profits but rather users for the platform business.

Using platform revenue alone, then, ROKU trades at something like 13x 2018 revenue. And that is a big number, even in this market. I’m still worried about the company’s minimal exposure to Netflix (NASDAQ:NFLX) and Alphabet’s YouTube, from whom the company gets immaterial revenue.

That said, a $5.6 billion enterprise value perhaps isn’t that onerous. As I’ve pointed out in the past, the Roku Channel alone likely supports a significant valuation. AMC Networks (NASDAQ:AMCX), hardly a content powerhouse, is valued at about $6 billion including debt. Certainly, the Roku Channel deserves a substantial discount to AMCX or other content plays. But there’s value there as well.

From here, the wise move seems to be to stick with ROKU stock because the story is selling, and should continue to do so. But valuation is a bit of question mark at this point, and something investors need to keep an eye on. A story can keep a growth stock afloat but at a certain point, valuation matters too.

As of this writing, Vince Martin has no positions in any securities mentioned.