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Roku (NASDAQ: ROKU) had a very difficult stretch operationally that started in the second quarter of 2022 due to a weak advertising market. Over the next year, the company consistently reported negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) until it broke the streak in the third quarter of 2023.

Since then, Roku has been back on track, reporting positive adjusted EBITDA and generating positive free cash flow. Its recently reported first-quarter results continued this trend, showing that the worst is behind the company.

However, Roku's overall metrics still have been quite mixed, and the stock is still down about 45% from its 52-week high. That begs the question: While the worst is behind Roku, does that make the stock a buy? Let's take a look at the good and the bad.

The good

Roku's first quarter was decidedly mixed. On the positive front, the company solidly grew its revenue 19% year over year. Even more importantly, its platform revenue also rose 19%, and it added 1.3 million new users in the quarter. That brought up its total user households to 81.6 million.

While Roku is often associated with its hardware streaming devices, the company's platform business is its core business. Roku makes money here by taking a cut of subscriptions sold through its platform, as well as through advertising on its own Roku streaming channel or getting advertising slots from ad-based streaming services whose users sign up through its platform. This is important, because this type of business is more valuable than a consumer electronics hardware business.

In addition to increasing its revenue, Roku also did a nice job of lowering its expenses in Q1, reducing overall costs by 16% to $460.3 million. The company was able to lower costs across the board in the areas of R&D, sales & marketing, and general and administrative.

This helped Roku report positive adjusted EBITDA of $40.9 million, compared to an adjusted EBITDA loss of $69.1 million a year ago. Roku generated a solid $46.7 million in operating cash flow in the quarter, which was a big improvement on the cash outflow of $153.4 million it saw a year ago.

The bad

While this was solid progress, there are some other underlying metrics that continue to be lackluster. One such important metric is ARPU, or average revenue per user. Roku saw its Q1 ARPU remain flat year over year at $40.65, and this number has been flattish since the end of 2021, when it was $41.03. The fact that ARPU has flatlined is disappointing and places more emphasis on the company adding more users when it already has a strong market share.

Gross margins for Roku also slightly deteriorated. Platform gross margins were down 40 basis points to 52.2% from 52.6% last year. Meanwhile, device gross margins remained negative for the fourth straight quarter at -4.8%. Essentially, Roku has started using its streaming devices as loss leaders to drive more households into its ecosystem.

Then there is the issue of Roku's generous stock-based compensation, which totaled $94.6 million in the first quarter. Stock-based compensation is one of Wall Street's dirty little secrets. It's a noncash expense, so companies remove it from their adjusted EBITDA and sometimes adjusted EPS numbers.

However, stock-based compensation is a real expense. It is used to attract and retain employees as part of their pay in lieu of cash compensation. Instead of consuming cash, it dilutes shareholders. Some companies will then use cash to buy back shares to help mitigate this dilution. Ultimately, this makes companies look more profitable than they are.

In the case of Roku, the company would not be close to adjusted EBITDA positive when taking into account its high use of stock compensation. When adjusted for stock-based compensation, its twice-adjusted EBITDA would suddenly go from $40.9 million to a negative $53.7 million. That's a huge difference.

So is Roku a buy?

Roku has built a valuable streaming platform, but in the last few years, the company has been unable to increase the profitability of its existing user base. At the same time, Roku is very penetrated within U.S. households. This means expansion is most likely to come from outside the U.S., where ad-based monetization is typically much lower.

Subtracting Roku's $2 billion in net cash from its market cap to get its enterprise value (EV), the company is currently worth about $80 per user household. At around 50% platform gross margins and ARPU near $40, that's a four-year payback on each user before corporate costs.

That's not particularly expensive, but Roku's corporate structure and use of stock-based compensation make it bloated. As such, I think Roku would make a good acquisition candidate for a larger company, but it's not a stand-alone investment I like due to its current issues.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.