Best Stock to Buy Right Now: Roku vs Netflix
If you're investing in the digital future of media and entertainment, both Netflix (NASDAQ: NFLX) and Roku (NASDAQ: ROKU) must have crossed your radar a few times.
After dominating the video rental industry with its innovative DVD-mailer service, Netflix kick-started the digital media-streaming replacement. After proving to a skeptical industry that online video services could be a real and profitable business, one could argue that Netflix created the streaming industry largely on its own.
Roku started out as the streaming hardware division of Netflix when digital media services were young and raw. But Netflix wanted a clear separation between its video service and the set-top box that sent those signals to your living-room TV, so Roku spun off as a separate company in 2009. Many rivals have developed viewer-friendly set-top boxes and streaming sticks, but Roku remains the name to beat with an unbeatable market share in 2024.
I'm looking at two pioneers of digital streaming, separated at Roku's birth. They're more like parent and child than siblings or cousins, yet definitely in the same family. But they address very different niches of the digital entertainment opportunity, and the stocks could hardly be more different.
So which one is the better buy in the spring of 2024?
It really depends on what you're looking for in an entertainment stock, and both belong in any portfolio focused on the digital media sector. But I've been buying a lot more Roku stock than Netflix shares.
Here's why.
Two peas in a digital pod
Netflix and Roku are exploring the same enormous growth story. One is building the most popular content service on the planet. The other provides the hardware and software needed to display videos from Netflix (and its many rivals) on your favorite big-screen TV.
They have challengers and alternatives, and I honestly wouldn't want it any other way. Imagine a world with only one car model, or where you can get your phone in any color as long as it's black and made by Western Electric. Options and rivalries result in a healthier marketplace, where consumers get to express their individual tastes while enjoying lower prices and more new features overall.
That being said, Roku and Netflix occasionally come close to achieving monopoly status.
It's been a while for Netflix, as every movie and TV-series producer of note launched their own streaming services in recent years. Subscribing to every possible alternative could drive your streaming bills close to the stifling costs of full-service cable TV packages.
So Netflix only accounted for 8% of the average American household's video-viewing time in December 2023, according to reports from Nielsen Media. The same report also highlights the magnitude of the untapped opportunity, as old-school cable/satellite/broadcast TV held a 64% share of those valuable viewing hours.
Can Roku keep up with Netflix's growth prospects?
Netflix clearly has plenty of growing left to do. Digital streaming is stealing cable TV's lunch, along with broadcast's snack and the theatrical film industry's dinner.
But that's not just good news for Netflix and its frenemies.
It's even better tidings for Roku.
The market for media-streaming platforms is deeply fragmented, but Roku is a firmly established leader.
"We're the No. 1 in Mexico, as well as the US," said founder and CEO Anthony Wood in Roku's fourth-quarter earnings call. "We're doing extremely well in Canada. We're doing well in all of Latin America. We're making great progress in Brazil.... We're also doing well in the UK."
In other words, Roku is the largest platform provider in the most mature streaming markets, and growing quickly in other geographic expansions.
But it's not all about the number of users or units sold. You see, Roku also runs a highly successful advertising service in the menu spaces where users are looking for the next thing to watch. And I really mean successful. Privacy analytics firm Pixalate reported Roku's North American share of voice (SOV) at 51% last fall. After the holidays of 2023, that mighty market share jumped to 55%.
SOV measures "the percentage of programmatic ads sold" in a specific region. Roku also leads the pack in Latin America while splitting the Europe, Middle-East, and Africa (EMEA) market almost evenly with Amazon and Samsung.
That's a money-making metric, friends. Roku is an effective cash machine, even in a slow-growing period. The company generated $176 million of free cash flow in the fourth quarter of 2024, adding more reserves to its $2.0 billion cash wallet on a debt-free balance sheet.
In other words, Roku's business is running smoothly despite economic pressures and a stubborn downturn in the ad-sales market. Now imagine what this company could do in a healthy economy.
Price changes and valuations
Netflix's stock is on the mend already. It trades below its four-year average price to sales (P/S) ratio, but the buying window may be about to close. Meanwhile, Roku's stock trades more than 85% below the all-time highs of 2021. Its P/S ratio of 2.6 is more appropriate for a slow-and-steady retailer or oil producer, not a skyrocketing growth stock with ambitious long-term market goals.
Yes, I recommend Netflix if you're looking for a top-quality media service trading at a modest price. But Roku comes with a bright red bargain-bin price tag, and its growth opportunity over the next few years may be even greater than Netflix's.
The choice is clear. With Roku's explosive growth potential and current fire-sale price, it's the smarter investment right now. Don't miss out on this opportunity to buy into the future of streaming entertainment.
Should you invest $1,000 in Roku right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Amazon, Netflix, and Roku. The Motley Fool has positions in and recommends Amazon, Netflix, and Roku. The Motley Fool has a disclosure policy.
Best Stock to Buy Right Now: Roku vs Netflix was originally published by The Motley Fool
