High inflation, rising interest rates, and a weak macroeconomic environment have led to slowdowns at companies like Netflix (NFLX -0.69%) and Roku (ROKU -10.31%) in 2022. Consumer behavior normalized following a pandemic-fueled surge in demand, and it's making matters worse. Investors have pressed pause on these businesses, and both have seen their share prices fall more than 50% this year compared to a 28% drop for the Nasdaq Composite.
Which is the better streaming stock for investors to own: Netflix or Roku? Let's focus on each company's distinct advantages to see which one reigns supreme.
Netflix's advantages
With a first-mover advantage in the now-crowded streaming market, Netflix benefits tremendously from its massive scale, with trailing-12-month sales of $31.5 billion and a whopping 223 million subscribers today. This size allows the business to spend a considerable amount on content ($17 billion this year), while spreading out these fixed costs over a giant customer base. Rivals can't compete with Netflix in this regard, and their streaming services will probably bleed cash for the foreseeable future.
Because Netflix has been dominating the streaming game for over a decade, it has amassed a treasure trove of valuable data about its viewers, such as how much time they spend watching and what their favorite types of shows and movies are. This is why Netflix's recommendation algorithm gets a lot of praise; it's the most polished tool in the industry at putting the right content in front of viewers.
Speaking of data, Netflix's introduction of a cheaper, ad-based subscription tier should be incredibly valuable to businesses that are looking to show targeted ads. This is expected to add incremental revenue for Netflix over time, while helping to bring in more price-sensitive members.
Netflix's management team is confident the company will generate roughly $1 billion in free cash flow this year, with "substantial growth" in 2023, after posting losses for most of its history. Netflix is simply in a much better financial position than the rest of the industry because of its huge head start in streaming.
Roku's advantages
Perhaps the most important advantage Roku has is that it doesn't care which company -- be it Netflix or Walt Disney or Warner Bros Discovery (among many others) -- ends up with the most subscribers and wins the streaming wars. Roku essentially gains on the backs of these content companies investing tens of billions of dollars on releasing new shows and movies.
As an aggregator of an increasing number of these services, Roku provides value to both consumers looking to access all their subscriptions in one place, as well as advertisers looking to target these viewers in a connected-TV format. As a result, Roku also benefits from network effects.
More streaming services on its platform attract more active accounts, of which Roku currently has 65.4 million. And as these accounts spend more time on Roku, with 21.9 billion hours streamed on Roku in Q3, both small and large businesses want to advertise on the platform. It's a powerful flywheel effect that gets stronger as it gets bigger.
Because Roku collects high-margin fees for displaying ads on its platform, the introduction of advertising-based streaming options, like the one Netflix just launched, should boost the company's prospects. If a viewer is streaming Netflix (or any other ad-supported service) from their Roku device and sees an ad, Roku receives 30% of the revenue.
An increase in this ad inventory translates to greater sales potential for Roku. Furthermore, the transition from traditional cable TV to connected TV should see a sizable shift in advertising dollars flowing to a platform like Roku's over time.
The winner
If I had to choose just one winner, based on what I've outlined above, I'd have to go with Roku. The company is in an advantageous competitive position in the entire streaming value chain, benefiting as the whole industry expands, with a sizable growth opportunity ahead of it. Plus, with the stock down 76% in 2022, the upside to owning Roku shares is bigger than Netflix's, in my opinion.
However, I don't see a reason why investors who want to bet on the growth of the overall streaming-video market can't simply own both of these stocks. With Netflix, investors get the leading content service, and with Roku, investors get the leading streaming platform. Their much lower share prices mean it could be as good a time as any to add them to your portfolio.
