Over the past year, the COVID-19 crisis generated strong tailwinds for Roku (ROKU +0.23%) but brutal headwinds for Disney (DIS 1.01%).
Roku's growth accelerated as more people bought its streaming devices to watch shows and movies at home. Disney's growth decelerated as it shut down its theme parks, dealt with theater closures and delayed movies, and continued to lose cable subscribers to streaming platforms.
As a result, Roku's stock more than doubled this year as Disney's stock rose by the low single digits. But with several vaccines on the horizon, is it time to take profits in Roku and bet on Disney's recovery?
Image source: Roku.
The differences between Roku and Disney
Roku generated 71% of its revenue from its platform business in the first nine months of 2020. This business generates most of its revenue from online ads and content distribution partnerships on its software platform.
The remaining 29% of its revenue came from its player business, which sells its streaming hardware devices. The platform business generates much higher margins than the player business, and it generated 92% of its gross profit during the first nine months of the year.
Disney generated 43% of its revenue from its Media Networks (broadcast and cable networks) unit in fiscal 2020, which ended in October. Its parks, experiences, and products division generated 25% of its revenue.
Its direct-to-consumer and international (DTCI) unit, which controls its growing streaming unit, accounted for 26% of its revenue. The studio entertainment business, which handles its movie properties, accounted for another 15%. That total percentage exceeded 100% in 2020 due to eliminations between its shifting business segments.
Roku generates robust growth -- but no profits
Roku's total revenue rose 57% year-over-year in the first nine months of the year, as its platform and player revenues rose 66% and 40%, respectively.
Its 57% year-over-year jump in player unit sales during the third quarter notably marked its strongest growth in hardware shipments in over seven years. That robust growth indicates it isn't losing the market to rivals like Alphabet's Google Chromecast, Amazon's Fire TV, and Apple TV.
Roku also finished the third quarter with 46 million active accounts, up 43% from a year earlier, and its average revenue per user (ARPU) rose 20% to $27.00 as users consumed more content and ads on it platform.
However, Roku's gross margin declined as lower ad sales throughout the crisis reduced the platform unit's margins and offset its improving hardware margins. Its net loss also widened year-over-year from $44.2 million to $84.8 million in the first nine months, but it posted an operating profit in the third quarter as it cut costs throughout the pandemic.
Analysts expect Roku's revenue to rise 53% this year and 38% next year, but it will likely remain unprofitable for the foreseeable future. Roku's growth rates are still impressive, however, and its stock trades at 15 times next year's sales -- which is a lower price-to-sales ratio than those of many other recent tech IPOs.
Disney is profitable -- but it's under pressure
Disney's revenue fell 6% in fiscal 2020, as rising revenue at its media networks and DTCI segments offset the double-digit declines at its studio entertainment unit and parks, experiences, and products unit.
However, the loss of its higher-margin theme park and movie revenue, along with widening losses at the DTCI's streaming segment, crushed its margins and reduced its adjusted earnings by 65%.
Image source: Disney.
In response, Disney suspended its dividend, launched an $11 billion debt offering, and cut jobs. It brought back former CEO Bob Iger as an executive chairman to assist CEO Bob Chapek, and united its media subsidiaries into a new "Media and Entertainment Distribution" group to prioritize the growth of its streaming services.
But Disney still faces an uphill battle in 2021. Its parks could close again as COVID-19 cases surge worldwide, and it could take months for a vaccine to be widely distributed. Even if the pandemic ends, the economic fallout could reduce visits to Disney's pricey parks.
Its studio business will face tough year-over-year comparisons against Star Wars: The Rise of Skywalker and Frozen 2, and its cable networks will likely continue to lose subscribers as it pours more cash into its money-losing streaming platforms.
Analysts expect Disney's revenue to rise 5% and for its earnings to dip 3% this year. But next year, they expect its revenue to rise 20% and for its earnings to more than double as its business stabilizes. That outlook seems promising, but there's still too much optimism baked into the stock at over 60 times forward earnings.
The winner: Roku
I've owned shares of Disney for years, but I wouldn't add shares right now. The company isn't out of the woods yet, and the stock's premium valuation doesn't accurately reflect its near-term challenges.
Roku, however, has impressed me over the past few quarters. It didn't buckle under competitive pressure from Amazon and other big rivals, and its platform continued to lock in advertisers, partners, and viewers.
Roku's stock is still reasonably valued relative to its revenue growth, and its margins could improve again as ad sales accelerate. Therefore, it's still a compelling buy after its massive rally this year.
