Better Buy: Netflix vs. Roku
For an industry that exploded over the past two years, with tons of new players and soaring revenue, streaming is beginning a hard fall. But therein lies the problem; there are too many names in the market now, and they've all grown so fast that it's hard to post higher growth. There are only so many eyeballs to catch, and with the crowded landscape, it's easy to switch back and forth.
Two of the most prominent streaming companies are Netflix (NASDAQ: NFLX) and Roku (NASDAQ: ROKU). Which one of these stocks is the better buy today?
Netflix: Holding its place as the leading streaming company
Netflix has faced formidable competition over the past few years as the new crop of streaming companies tries to chip away some of its market share. You have to give it a lot of credit for fending off these rivals, in addition to keeping up newly positive cash flow and robust profits. In fact, as most of the newer players duke it out for eyeballs and try to become profitable, Netflix is enjoying its leader status and will most likely be one of the companies left standing when the streaming wars are over.
That's not to say it hasn't faced enormous challenges recently, nor is it out of the woods just yet. But it pivoted to offering gaming services and an ad-supported tier recently when subscriptions began to decline, it raised prices on its premium tier, and it continues to release popular content. These moves are generating subscription additions and higher revenue. Netflix now has more than 232 million paid subscriptions, and although the rate of growth has slowed, growth generation at this stage is meaningful.
After not disclosing a lot of information about how the ad tier is coming along, management gave advertisers an update on how it's doing at an advertiser event last week. The news was positive, and management said there were already 5 million subscribers to the service. It also laid out ideas for different types of advertisements and plans that could generate further growth. Netflix stock jumped after the news.
Netflix's revenue increased 3.7% over last year in the first quarter of 2023, but its operating income and margin both fell year over year. Still, its operating margin improved compared with the three previous quarters. Free cash flow was very strong, partially a reflection of content spending coming in lower than expected. Meanwhile, net income decreased from last year.
NFLX Net Income (Quarterly) data by YCharts.
This might all mean that Netflix has become more of a value stock than a growth stock, but it's demonstrating incredible staying power, and it looks like it's making a solid case for further growth and long-term viability.
Roku: The strength of the software and hardware combo
Roku originally gained prominence as a manufacturer of popular streaming devices, beating out even Amazon as the No. 1 streaming operating system. It has had a relationship with Netflix for years, and part of its growth has been due to developing partnerships with streaming companies. It's typically a win-win situation since Roku benefits from being able to stream more channels, and networks benefit from viewers being able to stream their content in more places.
But Roku's sales growth really began to take off with its advertising relationships. For several years, ad revenue growth strongly outperformed player sales growth, and they diverged further when player sales slowed down with supply chain problems and inflation. Now ad sales are slowing down as many companies are tightening their budgets.
Management explained some of its advertising strategies, and Netflix might take a page from its playbook. Some of its plans include having advertising companies sponsor shows that match well with its messages, such as Coca-Cola sponsoring a show for people passionate about food, sports, and culture.
Roku is a competitive streaming network, with 71.6 million active accounts as of the end of the first quarter, or a 17% increase year over year. That number has also been increasing for the past four quarters consecutively. Roku managed to squeeze out a 1% year-over-year sales increase in the first quarter of 2023, even as ad sales fell 1% year over year. A rebound in device sales helped drive the increase, with the sales climbing 18% over last year. Streaming hours increased 20% over last year, although average revenue per user declined. Meanwhile, Roku's operating loss ballooned to $212 million, and its net loss expanded from $26 million to $194 million this year.
With all of that information in mind, it appears Roku is very popular with viewers, but it's having a hard time monetizing that popularity in the current economic climate. Its issues are slightly different than Netflix's, but it's struggling similarly in a pressured environment with many streaming options. However, when the streaming wars are over, Roku is also likely to remain standing.
It has been profitable before, when sales skyrocketed at the beginning of the pandemic. Investors know the path to profitability exists. In some ways, Roku was hurt by that earlier, unexpected profitability because it was challenging to maintain and interrupted its strategic growth plans.
Which stock is the better buy today?
Both of these stocks look a bit risky today, and I don't see either of them as no-brainer buys. However, they both have attractive qualities that could meet certain investors' criteria, whether strong cash generation for Netflix or long-term growth potential for Roku.
In a choice between the two, I would choose Roku today. It feels like a bit of contrarian play, but I see it demonstrating performance under pressure and developing innovative strategies, actions that Netflix is now copying.
The stock is cheaper than Netflix, trading at 2 times trailing-12-month sales vs. 5 for Netflix. It's also down 44% over the past year, while Netflix is up 96%, but Roku is up 32% this year, and it may have bottomed out already. I can't say the only way is up, but I see a huge upside in the long term.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com, Netflix, and Roku. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
