Netflix (NFLX -1.56%) and Roku (ROKU 0.95%) are considered among the streaming industry leaders, but there are important differences between the two companies. The former offers a library of content, while the latter offers media players that support various streaming channels, including some that compete with Netflix.
Still, both companies should benefit from the increased switch to streaming over the long run. But which one is the better stock pick for investors? Let's dig in and find out.
The case for Netflix
As of the first quarter, Netflix had 232.5 million paying subscribers, an increase of 4.9% year over year. It also generated $8.2 billion in revenue, almost 4% higher than the year-ago period. And on the bottom line, Netflix's net income of $1.3 billion decreased from the $1.6 billion reported in the prior-year quarter. Netflix's free cash flow of $2.1 billion more than doubled compared to the prior-year quarter.
Netflix has made important changes to its business that should yield tangible benefits. Last year, it introduced a low-price, ad-supported tier to attract price-sensitive consumers. The company started rolling out its solution to password sharing this year by charging primary account holders for sub-accounts. With an estimated 100 million households accessing Netflix for free, this could make a meaningful difference over the long run.
Meanwhile, the streaming market continues to take over. As of April, it accounted for 34% of television time in the U.S., up from 30.4% in the same month of last year. The U.S. is one of the more advanced streaming markets; even here, it hasn't reached 50% of television viewing time.
Netflix saw 6.9% of that total in April 2023 compared to 6.6% the year prior. The only streaming platform with more impressive engagement was YouTube, a different animal.
Among those that compete directly with Netflix, none even came close. Netflix should be able to profit from the vast global streaming opportunity as it continues to generate highly successful content that spreads through word of mouth.
Expect the company's revenue, earnings, cash flow, and share price to move in the right direction for a long time.
The case for Roku
Roku is one of the leading providers of streaming devices, but the company's real opportunity lies in its platform segment, where it generates revenue primarily from ads but also from other services (such as the licensing of its operating system to television manufacturers). Since so much of its revenue comes from advertisement, it's unsurprising that Roku's revenue has suffered lately.
In Q1, the company's top line increased by only 1% year over year to $741 million. But on the positive side, Roku continues to increase its active accounts and engagement.
As of the end of Q1, Roku's active accounts came in at 71.6 million, a 17% year-over-year jump, while streaming hours increased by 20% year over year to 25.1 billion.
Roku's revenue-growth rates will improve once the advertising market bounces back. Naturally, the company will also benefit from the rise of streaming since advertisers will follow viewers wherever they go to put product offers right in front of their eyes.
That's why Roku was willing to sacrifice its bottom line by insulating consumers from the higher costs of getting its namesake streaming players on the market.
In Q1, Roku's net loss of $193.6 million was worse than the loss of $26.3 million reported during the year-ago period. Roku should turn a consistent profit down the line and deliver excellent results if the company's strategy pays off.
The verdict
Netflix and Roku look like great buys for patient investors. Streaming is nowhere near replacing linear television, which could take a couple of decades (or more) to happen worldwide, giving plenty of growth fuel to both companies.
However, if I had to pick one of these stocks right now, it would be Netflix since it faces less uncertainty.
Netflix is consistently profitable, has been growing its cash flow, and has recently added important features to its business that should help it fend off some of its biggest threats. That's what makes Netflix a better buy today.
