Better Buy: Roku vs. Netflix
Roku (NASDAQ: ROKU) started out as a streaming device spin-off of Netflix (NASDAQ: NFLX) in 2008. Since then, both companies have profited from the explosive growth of the streaming market. Roku is now the top streaming device brand in the U.S., while Netflix is the world's largest premium streaming video platform.
Roku and Netflix both experienced robust growth during the pandemic, which drove more people to stay at home and watch more streaming content. However, that growth spurt also set both companies up for tough year-over-year comparisons in a post-pandemic market. Rising interest rates exacerbated that pressure by driving investors away from growth stocks.
That's why Roku and Netflix now trade about 90% and 50%, respectively, below their record highs from 2021. Should investors buy either of these fallen stocks as a long-term play on the streaming media market?
Image source: Getty Images.
The differences between Roku and Netflix
In 2022 Roku generated 87% of its revenue from its platform division, which sells ads on Roku OS (and the integrated Roku Channel). The other 13% came from its devices unit, which sells streaming sticks, boxes, and smart TVs.
Roku's platform business is profitable, but its devices business isn't. It aims to subsidize the growth of its loss-leading devices with its higher-margin platform revenue, but that strategy faces two major hurdles. First, the macro headwinds have recently throttled its ad sales and reduced the gross margins of its platform business. Second, the device segment's losses have been widening as Roku grapples with higher supply chain costs. Instead of passing those costs onto its customers, Roku is absorbing them to maintain its lower prices and stay competitive in the crowded streaming device market.
Netflix generates nearly all of its revenue from its paid subscriptions, but that could gradually change as it rolls out cheaper ad-supported tiers this year. Most of Netflix's top competitors -- including Disney's (NYSE: DIS) Disney+, Warner Bros. Discovery's (NASDAQ: WBD) HBO Max, and Paramount+ (NASDAQ: PARA) -- already offer cheaper ad-supported tiers. But Netflix is still the only major streaming video platform that generates consistent profits.
Netflix is profitable for three simple reasons: It established a first-mover's advantage in the premium streaming video market in 2007, it leveraged that head start to expand its infrastructure and cut costs, and it developed a big library of first-party content that reduced its dependence on third-party content. Meanwhile, its rivals are all hastily expanding their infrastructure while clumsily pivoting from licensing-based business models to direct-to-consumer streams.
Which company is growing faster?
Roku and Netflix both experienced severe slowdowns in 2022. Roku's sales of ads and devices stalled out in a post-pandemic market rattled by macro headwinds, while Netflix struggled to expand as more competitors expanded into its backyard.
|
Growth Metric |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|
|
Roku Revenue Growth |
45% |
52% |
58% |
55% |
13% |
|
Netflix Revenue Growth |
35% |
28% |
24% |
19% |
6% |
Data source: Roku and Netflix.
For 2023, analysts expect Roku's revenue to only rise 5%, and for Netflix's revenue to grow 9%. We should take those estimates with a grain of salt, but they suggest the streaming market will remain sluggish in this tough macro environment.
Yet both companies are still gaining new users. Roku's number of active accounts rose 16% to 70 million in 2022, partly driven by the rapid growth of the Roku Channel, while Netflix's paid subscribers grew 4% to 231 million in 2022.
However, Roku will likely stay unprofitable for the foreseeable future as the losses from its devices segment continue to eat the platform segment's profits. Analysts expect Netflix's earnings to rise 15% this year as its subscriber growth stabilizes, it expands its ad-supported tier, and it cracks down on shared passwords.
The clear winner: Netflix
Netflix's high-growth days might be over, but it's still a more stable play on the secular expansion of the streaming market than Roku, which could see its margins continue to wither away as it ramps up its investments in the Roku Channel and wages a loss-leading war against formidable tech giants like Amazon, Alphabet's Google, and Apple in the saturated streaming device market. Netflix also faces competitive headwinds, but its scale, stable profit growth, and reasonable forward price-to-earnings ratio of 28 all make it a more attractive investment than Roku right now.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Alphabet, Amazon.com, Apple, Walt Disney, and Warner Bros. Discovery. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Netflix, Roku, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
