It's never too late to start accepting Roku (ROKU 6.58%) and Netflix (NFLX -1.12%) as the entertainment leaders of the new normal. KeyBanc analyst Justin Patterson is initiating coverage of the two streaming video powerhouses with bullish overweight ratings.
Roku and Netflix have naturally taken different approaches to cashing in on the streaming revolution. Netflix is the undisputed top dog when it comes to streaming services, with nearly 193 million paid memberships worldwide. No one else is even close when it comes to premium subscribers. Roku is the leading hub offering its users use to access thousands of apps -- including Netflix. It's the operating system of choice for smart-television manufacturers, and its rapidly expanding user base is up to 43 million accounts. They're both winning different games being played in the same arena, and that doesn't seem close to ending anytime soon.
Making your streams come true
Patterson feels both stocks offer plenty of upside at even today's heightened share prices. In Roku he sees new ads and the company's ad-supported channels driving stronger top-line growth than Wall Street's expecting. He sees fresh catalysts in the form of international expansion and the inevitable recovery of the ad market that has already held up better for the connected-TV industry. His new Street-high price target of $228 implies a gain of 45% from Monday's close.
His upside call for Netflix is slightly less ambitious. Patterson's price goal of $590 on Netflix is just 24% above where the shares are now, but he's still bullish on the service. He respects the pricing power of Netflix, as the platform has been able to push out four price increases in the U.S. since early 2014. The pandemic has not only sped up the migration process to streaming services in general, but Netflix in particular. Its leadership in over-the-top video is clear, and the path to long-term free cash flow growth is being set up nicely for Netflix.
Both companies have naturally made the most of the shelter-in-place phase of the COVID-19 crisis, but these trends won't be reversed once we're out in the wild again. Folks have grown comfortable with the convenience of streaming content from home as well as the perpetually widening catalog of content. It's not a fluke. Most of the country's movie theaters are now open but we're still not going to the corner multiplex. Folks are still cutting the cord with cable and satellite TV subscriptions sliding despite collectively spending the past few months at home with little to do.
Netflix will win. Patterson's price targets suggest that Roku will win by even more, and that makes sense. Roku is smaller than Netflix -- and its moat may seem easier to penetrate or duplicate -- but it's also growing substantially faster. Roku's revenue rose 42% in its latest quarter, compared to Netflix with its 25% top-line increase.
It's not a competition between Netflix and Roku. You can own both, and since they're both among the market's best growth stocks it's probably not a bad strategy if you feel that streaming video will continue to expand on its popularity in the future. If you're spending more and more time streaming media it only makes sense that you should allocate more of your portfolio to the stocks leading the revolution.