Please ensure Javascript is enabled for purposes of website accessibility

Forget Disney and Netflix: Here Are 2 Reasons to Consider This Streaming Stock Instead

By Neil Patel - Mar 4, 2021 at 7:24AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The belief that content ownership is essential may prove to be flawed.

2020 was an absolute boon for streaming service providers. 

Walt Disney's strategic shift to focus on its direct-to-consumer business has so far resulted in Disney+ amassing 95 million subscribers worldwide. It reached that number -- a target the company didn't expect to hit until 2024 -- just 14 months after the service launched.

Netflix, which pioneered streaming video, added 37 million users last year and finished its most recent quarter with 204 million paid memberships in over 190 countries. The company spent more on content in 2020 ($12.5 billion) than the annual revenue of nearly half the companies on the Fortune 500 list.

With both companies firing on all cylinders and both stocks near their all-time highs, it may come as a surprise that I think neither is the best streaming business to own over the long term. Here are two reasons why investors should instead consider buying Roku (ROKU 8.96%) to ride the cord-cutting trend. 

right hand holding remote watching streaming tv

Image source: Getty Images.

1. It's the TV platform of the future 

According to eMarketer, the number of U.S. households choosing to go without traditional pay-TV subscriptions will continue to grow. This shouldn't come as a surprise, but it does have major implications for the roughly $65 billion domestic television advertising market.

We are on our way to a future in which streaming will be the primary way people enjoy video content. Roku's targeted platform is there for advertisers looking to reach these consumers, and it has the ability to glean valuable insights about its audience in ways that just aren't possible with linear TV. 

More than one-third of all smart TVs sold in the U.S. now come equipped with the Roku operating system, and at the end of 2020, the company had 51.2 million active accounts, up 39% from a year prior. This all puts Roku in a powerful position -- by aggregating the growing number of streaming services for viewers, it owns the customer relationship. 

This creates a significant value proposition for advertisers, viewers, and content providers, and as a result, Roku's platform revenue soared by 81% in the fourth quarter. This high-margin segment includes the sale of advertising and content distribution services, and as it continues to grow, Roku's path to sustained profitability becomes clear. 

Unlike the large streaming companies whose content it aggregates, Roku benefits from network effects. As it gains more users, more advertising dollars will follow, which will then attract more content, and so on. Today, the business generates most of its revenue in the U.S., so as management continues executing on this successful strategy internationally, a long runway for growth is evident. 

2. It doesn't matter to Roku who wins the streaming wars 

As I mentioned, Netflix spends an enormous amount to create and acquire new content. Its competitors, including Disney (which plans to spend $14 billion to $16 billion per year on streaming content for Disney+, ESPN+, and Hulu by 2024), will likewise need to deploy lots of cash to keep consumers engaged and entertained. While this game plan has certainly paved the way for Netflix's meteoric rise over the years, it brings up the very important question of when or if such huge outlays will ever end. 

Netflix does have the benefit of spreading its content costs over a large subscriber base, but in order to continue introducing fresh and interesting content, it will be compelled to keep spending billions and billions of dollars every year. Roku is indifferent as to who ultimately wins the streaming wars. As more people bid farewell to cable and shift to streaming, the company gains regardless. It's well on its way to becoming the dominant television operating system. 

Unbundling the cable package led us to the plethora of streaming services we have today. Now Roku will benefit as people choose how they want to bundle them back together and filter out what they don't want from a growing number of choices. Roku customers streamed a record 58.7 billion hours of content in 2020, a 55% jump from 2019. 

Roku is in a fantastic position to grow its business off the backs of Netflix's, Disney's, and others' huge content budgets, while attracting its share of the massive ad spend that will be redirected toward streaming. 

Roku stock has skyrocketed by more than 240% over the past year, but don't let that dissuade you. The company's current market cap under $50 billion is a fraction of the value of other streaming giants, but Roku may well end up the most important entity in the burgeoning streaming ecosystem.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
$96.47 (8.96%) $7.93
The Walt Disney Company Stock Quote
The Walt Disney Company
$109.32 (3.51%) $3.71
Netflix, Inc. Stock Quote
Netflix, Inc.
$195.19 (1.98%) $3.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.