Roku, Inc. (ROKU) and Netflix, Inc. (NFLX), two of the prominent players in the streaming TV industry, have been thriving because of robust growth in the demand for entertainment content amid the pandemic. School closures, shelter-in-place guidelines, and unemployment have given people more time to engage in social viewing.
Both stocks generated significant returns over the past three years. While ROKU returned 552.6% over this period, NFLX has gained 150.1%. In terms of year-to-date performance, ROKU is a clear winner with a 72.8% return versus NFLX’s 51.7% gain. But which of these stocks is a better pick now? Let’s find out.
Business Structure and Latest Movements
ROKU offers streaming devices for delivering entertainment to the television platform. The company also offers a Roku software developer kit that enables developers to build a channel that streams their content to the TV. It also provides advertising products and licenses under the Roku TV name.
The stock has been largely benefitting from the pandemic due to robust demand for TV streaming products, the expansion of partnerships for content distribution, and accelerating active account growth. The ROKU platform has over 46 million active accounts, and the company is witnessing strong sales of players and Roku TV models in both the United States and in international markets.
ROKU has recently added Apple (AAPL) Airplay to 4K devices, which gives users a new workaround to stream HBO Max and other mobile apps. In October, ROKU introduced the all-new Roku Ultra and unveiled the Roku Streambar for streamers looking to add powerful streaming and premium sound to any TV. On the software side, ROKU rolled out Roku OS 9.4 that offers customers new ways to access content quickly with a range of performance enhancements.
NFLX is widely known as the streaming giant due to its dominance in the industry. Similar to ROKU, it offers streaming services and engages in the internet delivery of TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. The platform has over 195 million global paid members.
The company’s focus on creating original content has been one of the key drivers of subscriber growth over the last decade. NFLX caters to a wide range of users and has invested heavily in developing content. Consequently, the company continues to invest heavily in local language content as part of its international expansion. However, the company has been facing a potential shortage of films and movies as production remained suspended during the first half of this year.
Recent Financial Results
In the third quarter that ended September 2020, ROKU’s total net revenue surged 73% year-over-year to $452 million as streaming rose 200 million hours to 14.8 billion. EPS for the quarter came in at $0.09, compared to the year-ago loss of $0.22 per share.
Active account growth continued to accelerate in the quarter. ROKU added 2.9 million accounts during the quarter, implying a 43% year-over-year rise. Average revenues per user (ARPU) increased 20% year-over-year to $27.
NFLX’s revenue for the quarter grew 22.7% year-over-year to $6.44 billion. Average streaming paid memberships rose 25%, while streaming ARPU decreased 1.6% year-over-year. However, growth has slowed with 2.2 million net additions of paid members during the quarter, compared to the year-ago net adds of 6.8 million. NFLX’s EPS grew 18.4% to $1.47.
Here ROKU is in an advantageous position.
Past and Expected Financial Performance
ROKU’s revenue and EPS grew at a CAGR of 48.9% and 486%, respectively, over the past twelve months.
The market expects the company’s revenue to increase 45.9% in the current quarter, 53.3% in the current year, and 36.8% next year. ROKU’s EPS is expected to grow 30.8% in the current quarter, and 19.5% next year.
On the other hand, NFLX’s revenue and EPS grew at a CAGR of 26.2% and 98.4%, respectively, over the past twelve months.
The market expects NFLX’s revenue to increase 20.7% in the current quarter, 23.8% in the current year, and 18% next year. The company’s EPS is expected to grow 6.2% in the current quarter, 51.8% in the current year, and 43.9% next year. Moreover, NFLX’s EPS is expected to grow at a rate of 41% per annum over the next five years.
NFLX has an edge over ROKU here.
NFLX’s trailing-12-month revenue is more than 17 times of what ROKU generates. But ROKU is more profitable, with a gross profit margin of 42.1% versus NFLX’s 38.8%.
However, NFLX’s ROE and ROA of 32.6% and 7.6%, compare favorably with ROKU’s -18.8% and -6.4%, respectively.
In terms of trailing P/S, ROKU is currently trading at 19.23x, 116.8% more expensive than NFLX, which is currently trading at 8.87x. Moreover, NFLX is less expensive in terms of trailing-12-month P/B (20.53x versus 26.62x). In terms of trailing-12-month price/cash flow, ROKU’s 345.27x is 79.5% higher than NFLX’s 192.39x.
Though ROKU looks much more expensive compared to NFLX, it’s worth paying this premium considering ROKU’s significantly higher earnings growth potential.
While ROKU is rated a “Buy” in our proprietary POWR Ratings system, NFLX is rated “Neutral.” Here are how the four components of the POWR Rating are graded for ROKU and NFLX:
ROKU has an “A” for Trade Grade, and a “B” for Peer Grade, Buy & Hold Grade, and Industry Rank. It is ranked #8 in the 30-stock Technology – Hardware indutry.
NFLX has an “A” for Industry Rank, a “B” for Buy & Hold Grade, and a “C” for Trade Grade and Peer Grade. In the 58-stock Internet industry, it is ranked #19.
While both ROKU and NFLX are good long-term investments considering their user engagement and continued market expansion, ROKU appears to be a better buy based on the factors discussed here.
While NFLX is a relatively cheaper option based on the accelerating shift from linear TVs to streaming platforms, ROKU is a proven winner and its premium valuation is justified given its revenue growth potential.
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NFLX shares were trading at $489.55 per share on Thursday morning, down $1.21 (-0.25%). Year-to-date, NFLX has gained 51.30%, versus a 11.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…