In this piece, I evaluated two streaming stocks, Netflix (NASDAQ:NFLX) and Roku (NASDAQ:ROKU), using TipRanks’ comparison tool to determine which is better. A closer look suggests a neutral view for Netflix and a bearish view for Roku.
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While Netflix and Roku both address the streaming media industry, they do so in different ways. In fact, Roku was actually spun off from Netflix in 2008. Netflix is a subscription video-on-demand streaming service that distributes both original and acquired TV shows and movies from a wide variety of genres.
On the other hand, Roku manufactures and sells devices and smart TVs that deliver streaming services like Netflix to consumers. It also licenses its streaming technology to other manufacturers and sells ads on its own streaming network, which has 70 million viewers. Netflix stock is up 54% year-to-date, while Roku stock is up 154% year-to-date, following a 25% gain over the last three months.
With Roku’s much higher share price gain, one would think it’s growing much faster than Netflix. However, Netflix’s growth is on top of a much larger base, which is important to remember when gauging sales and earnings growth. In fact, both companies have seen slowdowns since the pandemic, as people aren’t forced to stay home all the time.
Since Netflix and Roku address the streaming media industry in different ways, a head-to-head comparison of their valuations doesn’t work as well as it does with companies in the same industry. However, there are several other factors to consider that make it clear what sort of view each of them deserves.
Netflix (NASDAQ:NFLX)
Netflix has long been a Wall Street darling, although its price-to-earnings (P/E) ratio has tumbled in recent years, declining to around 45 versus its mean P/E of 67.7 since January 2019. While the stock has backed off its 52-week high of about $485, a neutral view seems appropriate — with a plan to monitor for a more attractive entry price.
First, it’s important to realize that Netflix isn’t going anywhere any time soon, and it will probably continue to be a favorite stock despite its slower growth. Although the stock is off 12% over the last three years, it’s up 60% over the last five and an impressive 793% over the last 10.
Thus, Netflix could be worth buying and holding for the very long term, but it seems like a better entry price may be coming down the pike before too long. The stock plummeted in early 2022 as the post-pandemic slowdown became apparent in the company’s financials, but it has since rebounded.
In its third-quarter earnings report, Netflix guided for an 11% increase in revenue for the fourth quarter, bringing it to $8.69 billion, although it came up short of the analyst consensus of $8.77 billion. The company also guided for net subscriber additions to be similar to what it saw in the third quarter.
Despite these warnings, it seems likely that Netflix will disappoint with its fourth-quarter earnings report. Even if there is no significant sell-off there, any signs of a major economic slowdown could be a temporary drag on Netflix stock, presenting a better opportunity to buy shares.
Although they’ve soared over the last 10 years, Netflix shares have had their ups and downs during that time. Thus, it seems like only a matter of time before a temporary reversal presents a buying opportunity.
What is the Price Target for NFLX Stock?
Netflix has a Moderate Buy consensus rating based on 24 Buys, 10 Holds, and one Sell rating assigned over the last three months. At $468.30, the average Netflix stock price target implies upside potential of 3.9%.
Roku (NASDAQ:ROKU)
Meanwhile, Roku is unprofitable, and its worsening margins suggest its growing scale isn’t even helping it approach profitability. The significant number of insider sales and high Relative Strength Index (RSI) complete the bearish picture for Roku.
First, Roku is in overbought territory, with an RSI of 70.7. Any RSI over 70 suggests a stock may be overbought and due for a correction. Although Roku’s RSI has ticked down slightly over the last 24 hours, there are enough other concerns to restrain a more constructive view.
As far as insider sales, TipRanks reports Informative Buys of $2.7 million worth of Roku shares over the last three months. However, a closer look reveals that the last informative-buy transaction was for $7.6 million three months ago, and since then, a growing number of Informative Sell transactions has been chipping away at that one Informative Buy transaction.
Additionally, there’s a meaningful number of Auto Sell transactions by insiders, which are not included in the tally of Informative Buys. Insiders typically file pre-set trading plans with the Securities and Exchange Commission, often including a price at which to automatically sell their shares so that they can avoid allegations of insider trading.
Thus, a significant number of Auto Sell transactions suggests insiders don’t see anymore near-term upside in their company’s stock, which is a bearish signal for investors.
Finally, Roku’s margins are cause for concern. The company’s operating margins tumbled from 8.7% in 2021 to -15.8% in 2022 and -17.4% in the last 12 months. Meanwhile, Roku’s net income margins fell from 8.8% in 2021 to -15.9% in 2022 and -25.8% in the last 12 months, indicating that its revenue growth of 55.5% in 2021 and 13.1% in 2022 (reflecting a post-pandemic slowdown) is not improving its prospects for profitability.
What is the Price Target for ROKU Stock?
Roku has a Moderate Buy consensus rating based on 10 Buys, 13 Holds, and two Sell ratings assigned over the last three months. At $86.52, the average Roku stock price target implies downside potential of 16.25%.
Conclusion: Neutral on NFLX, Bearish on ROKU
Long-term trends show why Netflix is likely a good long-term position, but they also indicate that Netflix shares tend to rise and fall a lot over an extended period. As a result, it seems like only a matter of time before a meaningful drop will present a buying opportunity, especially in the event of any serious economic downturn.
On the other hand, Roku’s long-term trends reveal an unprofitable company with steadily worsening margins that suggest it may not achieve full-year, unadjusted profitability for some time, perhaps even several years. Thus, when paired with its soaring stock price, Roku’s worsening financial picture makes it look very unattractive to investors.
