The Nasdaq Composite has dropped by 11% since the beginning of the year, and many tech giants have performed substantially worse. For instance, shares of streaming companies Netflix (NFLX -0.63%) and Roku (ROKU -10.29%) are down by 32% and 36%, respectively, since Jan. 1.
There are good reasons why both of these companies have lagged the market, but even with the headwinds they have faced, both remain excellent long-term picks to buy in February and hold onto for a long time. Let's see why.
1. Netflix
Netflix released its fourth-quarter and full-year 2021 earnings on Jan. 20. As per usual with this company, investors were interested, among other things, in its paid membership growth trends. Unfortunately, Netflix did not deliver in this department. In the fourth quarter, the company recorded 8.3 million net new memberships, which came up short of its guidance of 8.5 million.
Netflix also projected 2.5 million net new additions for the first quarter, compared to the 4 million it reported during the year-ago period. Furthermore, management finally admitted that competition is having an effect on its subscriber growth. The market responded to the company's quarterly update predictably -- by sending Netflix's stock more than 20% lower, although it has rebounded somewhat since.
Image source: Getty Images.
However, Netflix's overall results weren't all that bad. It ended the year with 221.84 million paid subscribers, representing an 8.9% increase compared to the year-ago period, and the company's revenue increased by 16% year over year to $7.7 billion in the fourth quarter. Netflix's Q4 net income of $607 million also jumped by 12% year over year.
Furthermore, despite some headwinds and uncertainty in the near term, I believe Netflix's long-term thesis remains intact. The company estimates that it still commands less than 10% of linear television viewing time in the U.S., which is its largest market.
Its penetration is likely lower everywhere else in the world. With more than one billion broadband households worldwide, Netflix's total paying subscribers of 221.84 million as of the end of the fourth quarter doesn't look all that impressive by comparison.
These numbers strongly suggest that there remains significant whitespace for streaming worldwide. Netflix is betting on its highly successful content strategy to attract new paying subscribers while driving greater retention among its existing customers.
Netflix's weak subscriber growth trends probably hit the company harder because of current market conditions. Investors have been taking their money out of growth stocks because of perceived marketwide worries, including impending interest rate hikes in the U.S.
Despite all these issues, sticking with this company through these tough times is likely to pay rich dividends down the road. Netflix's growth story is far from over.
2. Roku
Last year, supply chain issues and the associated higher production costs for various items disrupted Roku's business. Specifically, the company believes that some of its TV original equipment manufacturing partners -- who use Roku's operating system to power their televisions -- shifted higher manufacturing costs onto consumers, which led to television sales dropping below pre-COVID levels.
Meanwhile, the company chose to decrease the costs of its legacy Roku devices rather than pass them onto the customers. These challenges could plague Roku's business for a bit longer. Management predicted that they would last into 2022. Fortunately, the company's long-term prospects remain intact.
To understand why, it's critical to remember how Roku generates money. The company operates two segments. First, there is the player segment, in which it records sales of its Roku devices. Then there is Roku's platform revenue, which consists of digital advertising and operating system licensing revenue, among other things.
Roku's platform revenue has become increasingly important since it generates higher margins than its hardware business. For instance, during the third quarter of 2021, Roku's platform segment recorded a gross margin of 65%, while its platform segment had a negative gross margin of 15% (that is, it recorded a gross loss).
This disparity isn't just a result of recent supply chain disruptions. That's why Roku focuses on adding as many active accounts as possible, even if it ends up selling its namesake device at a loss. As of the end of the third quarter, the company had 56.4 million active accounts, which increased by 23% compared to the year-ago period.
The company also recorded total revenue of $680 million, 51% higher than the year-ago period. Roku reported a net income of $68.9 million, compared to the $12.9 million recorded during the third quarter of the previous fiscal year.
Roku will also benefit from the increased switch from broadband television and the growth of streaming in the long run, and as one of the leading providers of streaming devices, it is well-positioned to benefit. That's why recent issues shouldn't scare you away from this top tech stock.
