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The rising popularity of entertainment content streaming services over the past year has allowed companies in this space to generate significant returns. However, not all players in this industry have been able to capitalize on the tailwinds. We think collaboration with popular companies and lower-cost subscription choices should help Netflix (NFLX) deliver solid returns in the near-term. But Roku (ROKU), in contrast, has failed to assert dominance in a highly competitive industry. Let’s discuss.
The heightened demand for in-home entertainment allowed over-the-top (OTT) media services to expand their customer bases and grow significantly last year. Owing to improved quality and innovative content, as well as the creeping redundancy of traditional cable channels, global streaming subscriptions have increased 26% year-over-year to surpass 1.1 billion last year.
Furthermore, rising investor interest in streaming companies is evidenced by the iShares Evolved U.S. Media and Entertainment ETF’s (IEME) 60.3% returns over the past year, compared to SPDR S&P 500 ETF Trust’s (SPY) 42.9% gains.
The global video streaming services market is expected to grow at an 11% CAGR over the next five years to reach $108.31 billion by 2025. We believe popular subscription-based streaming service provider Netflix Inc. (NFLX) is well-positioned to benefit from this heightened demand. However, because of declining financials and low-rated shows, we think Roku, Inc. (ROKU) might struggle to stay afloat.
Stock to Buy:
Netflix Inc. (NFLX)
NFLX is one of the most popular online streaming entertainment service providers, offering TV series, documentaries, and feature films across a wide variety of genres and languages. The company provides members the ability to receive streaming content through a host of Internet-connected devices. It acquires, licenses and produces content, including original programming.
On May 9, NFLX announced its plans to soon launch an N-Plus subscription for users soon. This will help users get exclusive content related to their favorite shows, like behind-the-scenes, podcasts, and trivia, etc.
In April, NFLX and Sony Corporation’s (SONY) Sony Pictures Entertainment (SPE) announced a multiyear, exclusive first pay window licensing deal in the U.S. for theatrically released SPE feature films, beginning with its 2022 film slate. The agreement builds on NFLX’s pre-existing output deal with SPE’s Animation films to include all the studio’s film labels and genres. As part of the partnership, SONY will offer NFLX a first look at any films it intends to make directly for streaming or decides later to license for streaming, and NFLX has committed to produce a number of those films over the course of the deal.
In April, NFLX won a nearly two-year auction for the exclusive U.S. rights to stream SONY’s Sony Pictures’ theatrical releases in the first pay TV window, starting with SONY’s 2022 slate. NFLX has set a first-look agreement for all SONY’s original movies produced for the direct-to-streaming market that also requires NFLX to commit to a certain number of titles, but it doesn’t stop Sony from selling direct-to-streaming titles to Netflix’s rivals.
The company’s revenues have increased 24.2% year-over-year to $7.16 billion for its fiscal year 2021 first quarter, ended March 31. NFLX’s operating income came in at $1.96 billion, which represents a 104.2% rise year-over-year. Also, its net income was $1.71 billion for the quarter, up 140.7% from the prior-year period. NFLX’s EPS also increased 138.9% year-over-year to $3.75.
A $3.15 consensus EPS estimate for the current quarter, ending June 30, 2021, represents a 98.1% improvement year-over-year. The $7.32 billion consensus revenue estimate for the current quarter represents a 20.3% gain from the prior-year period. Analysts expect the stock’s EPS to grow at a 44.6% rate per annum over the next five years. The stock has gained 11.7% over the past year and closed yesterday’s trading session at $486.69.
It’s no surprise that NFLX has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Quality and Sentiment. Click here to see the additional ratings for NFLX (Growth, Value, Stability and Momentum).
NFLX is ranked #7 of 71 stocks in the Internet industry.
Stock to Avoid:
Roku, Inc. (ROKU)
ROKU operates a TV streaming platform that allows users to discover and access a variety of content, including live sports, music, news and more. The company also provides digital and video advertising, content distribution, subscription, and billing services, as well as other commercial transactions, brand sponsorship and promotions, and audience development campaigns. It also manufactures, sells, and licenses smart TVs under the Roku TV name.
On April 28, Tribeca X, a day-long festival event for marketers and filmmakers, partnered with ROKU to convene leading voices in advertising and entertainment through its platform, at the Tribeca Festival’s 20th anniversary on June 18 in New York.
In April, ROKU re-branded the content from its Quibi acquisition in January 2021 as ‘Roku Originals’. Available on The Roku Channel, Roku Originals will give viewers free access to bold, fresh entertainment from Hollywood stars. With many series set to debut on The Roku Channel this year, the addition of Roku Originals is expected to increase its customer base.
For its fiscal 2021 first quarter, ended March 31, ROKU’s total net revenues decreased 11.6% sequentially to $574.18 million. This can be attributed to a substantial decline in revenues from its platform segment. The company’s total operating expenses were $250.97 million for the quarter, up 4.4% from the fourth quarter of 2020.
Analysts expect ROKU’s loss per share to be $0.19 for the next quarter, ending September 30, which represents a 311.1% decline from the prior-year period. ROKU’s EPS is expected to decline at a rate of 31% rate per annum over the next five years. The stock has lost 35.8% over the past three months and closed yesterday’s trading session at $301.41, 38.1% lower than its 52-week high.
ROKU’s weak fundamentals are reflected in its POWR Ratings. The stock has a D grade for Value and Stability. Click here to see the additional ratings for ROKU (Growth, Sentiment, Quality and Momentum).
ROKU is ranked #56 of 71 stocks in the C-rated Consumer Goods industry.
NFLX shares were trading at $495.08 per share on Tuesday afternoon, up $8.39 (+1.72%). Year-to-date, NFLX has declined -8.44%, versus a 11.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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