Roku (ROKU -10.29%) recently reported its financial results for the last three months of 2023. And based on how shares are performing, investors weren't pleased with the numbers. Revenue was better than expected, but management warned of ongoing industry headwinds this year.
The latest update proves again that Roku is dealing with an uncertain macroeconomic backdrop. And this will continue to impact the digital advertising market in the near term.
Nonetheless, the business is still well positioned to gain from the growing number of cord-cutters. But is Roku the best streaming stock to buy right now? Let's take a closer look.
Top streaming platform
The best way to understand Roku's business model is to think of it as a three-sided platform, consisting of viewers, content providers, and advertisers. Viewers use the service as a way to enjoy all of their favorite movies and TV shows in one elegant interface. And advertisers who want to target a large, highly-engaged streaming audience can do so with Roku.
While the company does generate revenue from the sale of its hardware devices, including smart TVs and media sticks, the vast majority of its top line comes from the platform segment. This advertising and subscription revenue made up 86% of the total in 2023.
With the leading smart-TV operating system in the U.S., Canada, and Mexico, Roku has 80 million active accounts that streamed 29.1 billion hours of content last quarter.
What places Roku in an advantageous position is that it can ride the wave of streaming entertainment, while other companies spend tens of billions of dollars to produce this content. And as marketing dollars transition from traditional cable TV to connected TV, the business will benefit from greater digital advertising spend as well.
Shares have soared 77% since the beginning of 2023, but they're still 85% below their all-time high. They also trade at a price-to-sales multiple of 2.9, just a fraction of the historical average of 10.1. This beaten-down valuation helps support the argument that Roku might be the best way to play the streaming trend.
Top streaming service
However, investors can't ignore the dominant force in the industry: Netflix (NFLX -0.63%). After adding a better-than-expected 13.1 million net new subscribers last quarter, the company now has more than 260 million paying customers. This makes Netflix the largest streaming service on the planet with 2023 revenue totaling $33.7 billion.
I mentioned above how Roku largely avoids the massive spending that other streaming companies have to deal with. While it's true Netflix plans to spend a whopping $17 billion on content this year after shelling out the same amount in 2023, this company has an advantage thanks to its huge scale. Netflix has no problem spending this much money year in and year out because its user base is so big.
Management expects Netflix to report an operating margin of 24% in 2024 with free cash flow expected to total $6 billion. This puts the business in a league of its own in terms of financial strength. The success of paid sharing initiatives and the new ad-based tier are already supporting improved growth, and this can lead to even greater profitability over time.
This direct-to-consumer streaming service, which is dominating the industry, also qualifies as a top streaming stock. In other words, investors who want more exposure to this secular trend could consider owning shares of both Netflix and Roku.
