Investors have been treated to some huge stock price discounts in 2022, and the streaming video space is no exception. A growth hangover has Wall Street worried that earnings will be pressured over the next year or so as compared to earlier phases of the pandemic.
A temporary slump might set the stage for fantastic returns for investors who are willing to hold on through some turbulence ahead. With that in mind, let's compare two of the industry's leaders, Netflix (NFLX 2.66%) and Roku (ROKU 1.81%), to see which one looks more attractive today.
The latest trends
Neither business looks like a traditional growth stock right now. Netflix just posted two consecutive quarters of subscriber losses for the first time in its history, and revenue growth trends are falling to below 5%. Roku is seeing faster sales gains but a similarly weak trajectory. Revenue growth fell to 18% last quarter, continuing a four-quarter slide for the business.
NFLX Operating Revenue (Quarterly YoY Growth) data by YCharts
The earnings picture is brighter at Netflix, mainly thanks to its healthy economies of scale. The company remains solidly profitable and is still generating positive cash flow. Roku has swung to a loss over the last six months, in contrast, and operating cash flow has turned negative. These challenges won't quickly disappear, either. Management in late July projected losses in the third quarter even on an adjusted basis.
Roku doesn't expect demand to jump right back for its streaming video hardware or for its advertising services. "Reduced consumer discretionary spend is pressuring ... TV and player sales," executives said in July.
Netflix's easier path
Besides its lack of direct exposure to the hardware side of the business, Netflix has several factors supporting its likely rebound ahead.
Growth trends appear to have stabilized already, with management predicting a return to subscriber gains in the current quarter. Roku has much less confidence in the short term, and management retracted its 2022 outlook.
Netflix has promising growth avenues like its push into advertising, gaming, and its crackdown on shared passwords. Most Wall Street pros see annual sales rising by 7% in 2022, which is below the over 20% Netflix was targeting in recent years, but still solid.
The better buy
Given Netflix's brighter outlook it is surprising that both streaming video stocks are being valued essentially the same. Netflix is priced at about 3.5 times annual sales while Roku's P/S ratio is 3.1 times. Both stocks are down more than 50% so far in 2022.
Those pessimistic valuations mean there's a good chance investors will see strong returns from holding either of these stocks. The streaming video market will return to growth, after all, and Netflix and Roku each maintain dominant platforms with many opportunities for increasing earnings.
If I had to pick just one stock, though, it would be Netflix. The worst of the pandemic growth hangover might already be behind the business, and there's a clear path toward ever-increasing cash flow. While annual revenue trends might never again crack 20%, this global streaming giant still seems likely to trounce entertainment peers over the next decade or so.
