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Chicago, IL – May 6, 2022 – Zacks.com announces the list of stocks featured in the analyst blog. Every day, Zacks Equity Research analysts discuss the latest news and events impacting stocks and financial markets. Stocks recently featured in the blog include: Netflix NFLX, Roku ROKU, Amazon Prime Video AMZN, Apple TV AAPL, and Disney+ DIS.
Here are highlights from Thursday’s analyst blog:
Roku vs. Netflix: Which is the better buy?
It’s been an exciting earnings season so far. Whether investors were bullish or bearish, there were opportunities to capture gains on both sides of the table. However, it seems that a bearish position has been more successful, as we have seen in some of the selloffs that followed the quarterly reports.
Two companies that recently released quarterly results are Netflix and Roku. Both companies are streaming and entertainment giants, quickly becoming one of investors’ favorite stocks. With both companies’ shares skyrocketing over the past few years, it’s no secret why they’ve garnered a large following.
Following NFLX’s quarterly report, stocks were tossed in the trash. However, following Roku’s quarterly report, stocks reacted positively, stringing together four consecutive days in the green. Today, this sequence may be in danger; the market is a sea of red at every level.
Below is the year-to-date stock performance of both companies while incorporating the S&P 500 as a benchmark.
To put it simply, it’s been a tough time for NFLX and ROKU throughout 2022, with both companies losing more than half of their stock value. Netflix took a deeper hit, with shares slashing around two-thirds of their value.
The picture that equity performance has painted becomes even more interesting as the time frame expands over the past year. Roku shares followed a downward trajectory towards the end of July 2021, while NFLX shares remained on a healthy uptrend. However, the relative strength did not last long; Shares of Netflix took a strong downward trend last November.
Now that significant declines have reduced the valuations of these companies, it raises a valid question: which streaming giant can offer investors better value for money going forward? Let’s find out.
A pioneer in the field of streaming, Netflix started small as a DVD rental provider before turning to its daily bread, streaming.
The uprising of streaming services has made the industry much more competitive, and Netflix is no longer seen as the benchmark when consumers search for content online. Amazon Prime Video, Apple TV, and Disney+ are some of the major companies that have entered the streaming industry, negatively affecting NFLX.
Subscriber count is the most vital metric for NFLX, and things have turned sour in this area recently. Due to stay-at-home orders during the pandemic, the company’s subscriber numbers surged in 2020, adding 37 million new customers during the year, a 32% year-on-year jump. other than 2019. New member additions fell to 18.1 million in 2021, down 50% from the previous year. Additionally, in its latest quarterly release, the company provided some discouraging guidance; he expects a drop of two million subscribers in the next quarter.
Combining this with indications provided by NFLX in Q4 2021 that it expected 2.5 million new subscribers added versus the consensus of nearly 7 million, paints a picture that illustrates a slowdown in the growth of this once beloved stock.
With the huge debt that NFLX has used to fuel its operations, it has yet to generate positive free cash flow. Moreover, with the rise in interest rates, this debt situation becomes more alarming.
Netflix, Inc. price-consensus-eps-surprise-chart | Quote from Netflix, Inc.
The leading TV streaming platform in the United States based on streaming hours, Roku has evolved into a streaming heavyweight. We see Roku TV models everywhere.
The global supply chain has been unbalanced for 2022 and the majority of 2021, negatively affecting the speed at which Roku units can be delivered and eroding revenue overall. Additionally, the shortage of microchips has been a spoiler for the company in recent quarters. Although these are current issues, they should ease as the world emerges from the COVID-19 pandemic.
While NFLX has struggled to retain subscribers, Roku has steadily increased the number of active accounts on its platform quarter after quarter. The company reported 61.3 million active accounts in its latest quarterly report, up 2% from 60.1 million in Q4 2021. Additionally, according to Q2 estimates, the active account measure of ROKU increases 1.6% to $62.3 million.
While the company has also benefited massively from the pandemic-induced stay-at-home surge, it seems that Roku has always been able to stay on track and steadily expand its user base.
Roku’s balance sheet also seems stronger and more durable than NFLX’s. The company’s free cash flow turned positive in 2020, and the company isn’t weighed down by massive long-term debt to fuel its operations like Netflix is.
Roku, Inc. price-consensus-eps-surprise-chart | Quote from Roku, Inc.
While both companies are exciting and innovative investments, the companies’ recent quarterly reports and guidance are very telling. Netflix’s growth story has slowed significantly, changing investor sentiment massively. We can see it in the poor price action following the NFLX Q1 2022 report; shares fell 35% the day after the report.
On the other hand, Roku has seen steady growth in active users quarter after quarter. Additionally, a heavily leveraged balance sheet for NFLX will undoubtedly further hamper future growth. If the market wasn’t a sea of red today, ROKU stocks would be aiming for their 5and consecutive day in the green, a clear difference when looking at the performance of the two companies’ shares following the quarterly reports.
Slowing growth and a heavily leveraged balance sheet lead me to believe that Roku would be better suited for investors who want exposure to the streaming industry in the future.
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Past performance is not indicative of future results. The potential for loss is inherent in any investment. This document is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold any security. No recommendation or advice is given as to whether any investment is suitable for any particular investor. It should not be assumed that investments in the securities, companies, sectors or markets identified and described have been or will be profitable. All information is current as of the date hereof and is subject to change without notice. The views or opinions expressed may not reflect those of the company as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management of securities. These returns come from hypothetical portfolios composed of stocks with Zacks Rank = 1 that have been rebalanced monthly without transaction fees. These are not the returns of actual stock portfolios. The S&P 500 is an unmanaged index. To visit https://www.zacks.com/performance for more information on the performance figures displayed in this press release.
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