When consumers decided to “cut the cord” streaming movies, music, and live sports took over where cable ended. The bellwether in the streaming world is Netflix but the traction it gained early on led to others entering the fray.
And it’s no surprise why given that the global video streaming market is expected to grow at a CAGR of 21.5% until 2030.
With strong market growth tailwinds, two of the top streaming companies to buy now are Roku, Inc. (NASDAQ: ROKU) and Warner Bros. Discovery, Inc. (NASDAQ: WBD) but which is the better buy?
Roku
Roku is growing as a provider of devices and platforms that stream a wide variety of content. It offers smart TVs and a streaming platform loaded with channels and services.
Roku operates as an application that lets consumers access third-party streaming services, such as Netflix, Hulu, Disney+, and Amazon Prime Video. As such, it’s appealing to consumers who want a single interface for streaming.
Roku also generates revenue from advertisements, subscriptions, and hardware. The Roku Channel uses ad-supported model that attracts users who want access to free content.
Collaborations and expanding content lists are proving instrumental in establishing Roku as a leading provider with dominant market share and a moat that will prove ever more challenging to disrupt.
The combination of products, services and partnerships has translated impressive revenue for the most recent quarter of $968.2 million, up 14.3% from the same period the prior year.
In Q1 the company also reported streaming households that totaled 81.6 million globally for the quarter, which revealed the company’s keen ability to attract and retain users. Total streaming hours came in at 30.8 billion, a rise of 5.7 billion hours year over year, further highlighting how users are highly engaged in streaming content.
Average revenue per user, or ARPU, stood at $40.65 on a trailing 12-month basis but remained fairly flat, indicating that the company is masterful still at monetizing its user base.
While streaming is a growth industry, Roku stands out for having developed multiple revenue sources that have the potential to support future expansion. Roku’s ability to both attract and retain users bodes well for the long-term.
In the analyst community, the sentiment towards Roku is largely bullish with the consensus price target sitting at $68 per share.
The major plus in favor of the bulls is that revenues have been stunning and sit at $3.7 billion but the bears can cling to the negative net income as the reason why Roku isn’t yet set to soar.
If we cut to the cash flows we see a discounted cash flow forecast analysis paints a fair value assessment of $62 per share.
Warner Bros Discovery
Warner Bros. Discovery has gained prominence through its flagship streaming service, Max, previously known as HBO Max.
Max is comprised of a wide variety of hit movies and TV show seasons, along with Max Originals and shows from WarnerMedia brands. These content options differentiate Max from others in the industry, making the service especially attractive for consumers who want an all-inclusive entertainment experience.
Max has the potential to enable Warner Bros. Discovery compete even with Netflix’s and Disney’s bundle of streaming services (Disney+, Hulu, & ESPN+).
Warner Bros. Discovery is also increasing its global footprint, expanding subscriber numbers but revenues have slid over the past couple of quarters.
In the most recent quarter, Warner Bros. Discovery reported total revenues of $9.96 billion, a 6.9% decrease compared to the previous year’s quarter.
While the company’s bottom line is still in the red, free cash flow was at $390 million, a $1.3 billion improvement compared to the prior-year quarter.
The company is ramping up efforts and plans to expand Max to 29 countries across Europe, with a strong content lineup for the coming months. For the quarter, Global DTC subscribers rose to 99.6 million, an increase of 2.0 million subscribers from Q4.
The company has adopted several strategies to grow its streaming revenues. Max features an ad-supported tier, which helps attract cost-conscious consumers while generating additional revenue from advertising.
Additionally, in an attempt to boost revenues and view share, Discovery has been buying broadcasting rights for many sports leagues and sporting events that will attract a fixated sports viewership.
The integration of the companies aligns the content libraries to better Warner Bros position to compete with key players. In total, these measures might help consolidate the company’s position in the market and grow the subscriber base.
Analysts peg fair value of Warner Bros Discovery at $11.67 suggesting material upside opportunity of 20.9% to fair value. The company is also trading at a low price-to-book multiple and the current market capitalization of $19.3 billion implies strong free cash flow yield.
With all that said, three analysts have revised their guidance lower for the upcoming period, suggesting sentiment is softening on the future prospects. Moreover, the consensus among analysts is that the WBD will not be profitable this year.
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