Roku Stock: A Better Bet Than Netflix Post Covid?

by Trefis Team
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Both Roku (NASDAQ: ROKU) and Netflix (NASDAQ: NFLX) have been big beneficiaries of the stay at home orders through Covid-19, as people increasingly relied on streaming video to entertain themselves. However, Roku stock has outperformed Netflix by a sizable margin, rallying by over 160% this year, compared to Netflix which is up by about 60%. Roku now trades at over 32x trailing Revenue, compared to Netflix which trades at about 12x. However, there are a couple of good reasons for this disparity as investors are likely betting that Roku could fare better in a post Covid world, compared to Netflix.

See our analysis Roku vs. Netflix: Is ROKU Stock Appropriately Valued Versus NFLX? for more details on how the fundamentals and valuation metrics of the two companies compare.

Roku’s Growth Likely More Sustainable

Both companies have seen their user bases soar in recent months. Netflix paid subscriber base rose 23% year over year to 195 million as of Q2, while Roku saw its user base grow by 43% year over year to 46 million. While the surge for both companies was partly due to a pull-forward of subscribers, the uptake for Netflix is likely to cool significantly going forward, driven by competition from sporting and other live events post the pandemic, stronger competition from the likes of Disney, and the company’s recent price increases which could make customers rethink their subscriptions. Roku, on the other hand, which is platform agnostic – should likely continue to benefit from the adoption of smart TVs and streaming in general. Roku’s subscribers are also locked-in, in a sense, as they invest upfront in hardware (Roku streaming box or a Roku OS smart TV) potentially making them less inclined to switch.

Roku’s Long Runway For Monetization

While Roku’s ARPUs are still low, at $27 per year (last 12 months) versus over $120 for Netflix over the same period, Roku’s ad-driven model gives it a significant upside. Cord-cutting is gathering pace and marketers are moving ad budgets from linear TV toward digital platforms. Over Q3 2020, linear TV viewing among adults aged 18 to 49 years declined by about 17% year-over-year, per Roku. Roku indicated that its monetized video ad impressions rose almost 90% year-over-year over the same period. Roku’s Revenues are levered to total hours streamed (up 54% over Q3), given that it gets to display more ads, unlike Netflix which charges users a flat monthly fee and needs to count on price increases to drive per user revenue growth. Now price increases could be increasingly tricky for Netflix with the likes of Disney and Apple doubling down on streaming, with lower-priced offerings and quality content.

Cash Flows Vs. Profitability

Netflix is increasingly profitable (EPS likely to grow 50% this year) compared to Roku which still remains in the red, but the accounting profit doesn’t tell the full story. Netflix’s burgeoning content spending – about $15 billion last year – has meant that it has been burning through an increasing amount of cash each year, much of which is funded by taking on debt. (See our Deep Drive Into Netflix Content Spending)  While content investments are for the long-term, Netflix risks losing subscribers if it doesn’t keep updating its library at the same pace. Roku’s model, on the other hand, is much less cash-intensive, with costs primarily related to developing its hardware and maintaining its platform.

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