Netflix Vs Roku Stock: Which Is Best?

Netflix Vs Roku Stock: NFLX and Roku both benefited from the cord-cutting trends in cable TV subscriptions of recent years, and the stay-at-home orders coming from the national governments in the wake of the coronavirus pandemic have been massive tailwinds for both companies.

But, from a market perspective, which company makes for a better investment – and will one franchise win out over the other? Which business is growing faster, and what are the pros and cons of each? 

How Does Roku Make Money?

Roku is a TV streaming company that aggregates a variety of channels into its one, easy-to-use platform.

The business primarily generates revenues from the sale of digital advertising, premium subscriptions, and content distribution deals.

It also generates revenue from its branded devices wing, where it sells TV players and other hardware such as sound bars and streaming sticks.

Is Netflix Losing To Roku?

Netflix is still the leading streaming company worldwide. The firm streams to over 190 countries and has double the subscribers than its nearest rival.

However, when it comes to subscription growth, the picture is a little different. Roku has grown its active account numbers from 27 million in 2018, to 57 million in 2020.

Over the same period, Netflix grew its subscriber base from 139 million, up to 204 million. This meant Roku’s compound annual growth rate (CAGR) was 37% compared to Netflix’s 21%. Quite a difference.

There’s a similar story with revenue growth rates too. Roku beats Netflix again with a revenue increase of 55% CAGR, while Netflix trails with just 26%.

Is Roku Better Than Netflix? 

Roku’s business model is platform agnostic. As such, the company can generate revenues from a far more diverse set of money streams than Netflix can.

For instance, Roku currently takes about 20% of all subscription fees from premium content on its platform, as well as charging for ad inventory and licensing contracts, and even raises cash from marketers using its OneView product when launching ad campaigns either on or off Roku’s various platform services.

Netflix, on the other hand, has just its recurring subscriptions from which to make money. Roku certainly has more of an economic moat than Netflix in this regard.

Even so, Netflix claims the largest share of the market with respect to its video streaming peers. At 29% of the pie, Netflix beats YouTube’s 21% share and Hulu’s 12%.

One point should be made here: Roku partly depends on its competitor’s continued success as a streaming business as it provides Netflix – and other major streaming outlets – as an option for its customers on the site’s platform.

In fact, should Roku lose the right to offer these popular names it would be a blow to its business. There’s a certain complementarity between Netflix and Roku in this sense, and there’s an asymmetry there as it mainly benefits only the latter.

Roku Vs Netflix: Pros & Cons 

Let’s compare both companies as a value proposition to see which one offers a more attractive investment.

First, as mentioned earlier, Roku is a faster growing company than Netflix, both on subscriber count and revenue basis. This is because Netflix has most likely reached close to saturation point in the North America market – a market which accounts for its largest sales share and is its most profitable region.

And, while it’s true that Netflix is No. 1 when it comes to content – it produced nine out of the Top-10 most popular streaming series last year – the company is still desperate to cultivate new growth opportunities.

US subscriber growth is expected to drop to 3.6% and 1.7% in 2021 and 2022, respectively.

But this disparity between growth potential might already be locked in.

Roku’s 2021 Forward Price-to-Sales multiple is estimated at 18.28, whereas Netflix’s is much cheaper at 8.04.

The question becomes whether Roku’s predicted expansion has been overblown; the current Wall Street consensus has Roku’s next year revenue growth at nearly 46%. If it misses this goal, its high sales multiple could prove a problem.

Conversely, although Netflix offers less potential for growth than Roku, one positive catalyst could be on the horizon. The company has a history of issuing stock splits, such as it did in 2004 and 2015.

And although a stock split doesn’t alter the underlying value of a company, the practice is almost always considered a tailwind for a stock – a split will lower the price of an individual share, making purchasing a stock in the company more attractive to a general audience.

Tesla (TSLA) and Apple (AAPL) did it in 2020, and with Netflix’s share price inching up to the $700 mark when it last made the split (though it’s not there yet!), there’s reason to think that 2021 could be the year when it finally happens again.

Netflix Vs Roku Stock: Conclusion

As the world hopefully moves into a post-Covid reality this year, the tailwinds from the pandemic provided to streaming services such as Netflix and Roku will begin to abate.

Will Roku, with its greater growth potential and de-risked revenue model, cope with this change better than Netflix? Or will Netflix’s market dominance and household name carry it through?

Catalysts, both good and bad, could radically alter the fortunes of either company. But despite this, Roku and Netflix are still two of the best bets in the streaming service space. 

And streaming to TV now represents over a 20% share of the weekly US TV screen time market. That will only go up in the future. Getting into Roku or Netflix now will likely not be a mistake.

 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.