According to a Nielsen study published last month, the number of U.S. households with streaming TV capabilities has been steadily growing since 2017. Based on the findings, 65% of American households could stream TV in the first half of the year, up from 59% in the year-ago period and 51% in the first half of 2017.
Bearing this in mind, companies have been lining up to try and take a piece of this expanding market, which could reach $124.6 billion by 2025 according to Grand View Research. When looking for compelling opportunities within this space, Needham’s Laura Martin tells investors Roku beats out Netflix as her top pick.
That being said, we used the TipRanks Stock Comparison tool to dig a little deeper to see how the stocks stands up against each other.
Let’s take a closer look at the results.
Roku Inc. (ROKU)
While both occupy a significant portion of the streaming TV market, Roku and Netflix are two fundamentally different companies. Netflix operates as a subscription service while Roku’s business is based on streaming players and free content supported by ad-revenue.
Martin believes that this key difference will fuel even more gains for Roku on top of the 454% year-to-date growth it has already seen. After meeting with Roku’s management on September 5, Martin’s bullish thesis has only been confirmed. The company expects that the Roku Channel, its free, live and premium TV channel, will be an aggregator of 100% of ad-driven free content as well as over-the-top (OTT) channels and movies.
Any new or existing OTT streaming service will want access to Roku’s 36% of connected TV homes. The five-star analyst estimates that its advertising revenue will also continue to grow as almost $10 billion of the linear TV’s $70 billion of ad revenue moves to Roku.
The company also has an advantage in terms of data. When every new user installs a Roku stick or TV, they must register that device in order to access Roku’s content. This registration process involves assigning a unique Device ID, with the company able to monitor the content that the Device ID views. Roku can then analyze what is viewed compared to the 30 million other households it has data on in order to target ads.
Not to mention Roku is expanding its total available market with its new soundbar and subwoofer.
While some analysts aren’t fans of Roku based on its hefty valuation and lack of positive EPS since its founding, Martin believes that the above factors imply a strong long-term growth narrative. "We would argue that Roku has the superior strategic position because it benefits from all new OTT channels including ESPN+, Disney+, Apple+, HBO Max, etc. because it is an aggregator and therefore gets a share of revenue from every content app it adds to its platform," she explained. As a result, the analyst reiterated her Buy rating and $150 price target.
In general, Wall Street is also bullish on Roku as it has a ‘Moderate Buy’ analyst consensus. Given its massive year-to-date gain, it isn't surprising that its $123 average price target implies 28% downside potential.
Netflix Inc. (NFLX)
It’s no question that the dominant force in the streaming space has hit a rough patch recently. Investors were widely concerned after NFLX experienced a substantial drop in subscriber acquisition in its most recent quarter. That being said, Martin claims that its growing number of competitors will ultimately be its downfall.
Over the next year, Apple (AAPL), AT&T (T), Comcast (CMCSA) and Disney (DIS) will all release their own streaming services to compete directly with Netflix. This is on top of the competition it already faces from Amazon (AMZN), Hulu and CBS All Access (CBS).
Netflix is undoubtedly going to feel some pricing pressure from the competition. For example, Disney+ is a relative bargain with pricing starting at $6.99 per month, with its $12.99 per month premium package that includes Hulu and ESPN+ still less than Netflix’s equivalent service.
Martin argues that with 60 million paid U.S. subscribers as of June 30, NFLX has the most to lose out of all the streaming services. “Parks Associates found 28% of consumers said they have subscribed to a streaming service to check out a single title. By implication, NFLX’s subscribers will at least churn out for a few weeks during the promotional period of each new streaming service launch,” she added.
While the analyst does note that Roku relies on Netflix as the streaming service represented an estimated 20% of Roku’s total streaming hours in the first half of 2019, this is expected to change with the release of Disney+.
Based on all of the above factors, Martin tells investors that NFLX is a Hold.
Wall Street takes more of a bullish stance than Martin. The streaming giant boasts a ‘Strong Buy’ analyst consensus and a $411 average price target, suggesting 42% upside potential.
And the Winner is…
While Needham picks Roku over Netflix, the rest of the Street sees things differently. Even though the Stock Comparison tool shows that Roku has gained the most, Netflix takes the top spot in terms of both analyst consensus and upside potential.