With more than 4.95 billion internet users around the world, online entertainment is one of the most popular activities among users. It involves accessing entertainment content, including videos, music, books, and games over the internet.
According to Allied Market Research, the global online entertainment market is expected to reach $652.5 billion by 2027, growing at a CAGR of 20.82%. An increase in penetration of electronic devices and the presence of internet service at an affordable price is expected to drive the industry during the forecast period. Therefore, companies operating in this industry should benefit.
With this in mind, I am going to analyze and compare two beaten-down streaming stocks, Netflix, Inc. (NFLX) and Roku, Inc. (ROKU), to determine which one is a better buy.
Founded in 1997, Netflix is a global entertainment company that provides TV series, documentaries, feature films, and mobile games to its 222 million paid audience in 190 countries. Based in San Jose, California, Roku offers a TV streaming platform, enabling users to watch various media content, including movies and TV episodes, live sports, music, news, and others. The company operates through two business segments: Platform and Player.
Year-to-Date (YTD), both stocks have lost around 30% of their value.
Recent Developments
On January 31st, Citigroup analyst Jason Bazinet upgraded Netflix to "Buy" from "Neutral." The firm believes that the company looks underestimated based on the enterprise value per subscriber analysis. The analyst also noted that Netflix has "ample pricing power." However, Bazinet lowered the NFLX price target to $450 from $595.
On February 2nd, Roku announced that it had launched an advertising business in Mexico. The company also partnered up with Entravision Communications to help brands effectively reach consumers by advertising on the Roku streaming platform. Undoubtedly, it is a positive development that emphasizes the company’s expansion efforts into new markets.
Recent Quarterly Performance & Analysts Estimates
On January 20th, Netflix reported earnings for the fourth fiscal quarter of 2021. The company reported total revenue of $7.71 billion, representing an increase of 16.1% on a year-over-year basis. The company's top line stood in line with Wall Street estimates. Moreover, revenue growth was related to a 9% increase in average paid memberships and a 7% increase in average revenue per paying membership. Besides, NFLX's GAAP EPS stood at $1.33, beating analysts' consensus by $0.50.
However, the company came under significant selling pressure after releasing the earnings report amid the subscribers' growth concerns. The company missed both Street expectations and its guidance regarding subscriber additions. More precisely, Netflix gained 8.28 million new subscribers worldwide in Q4, compared to its expectations of 8.5 million and analysts estimates of 8.32 million. In addition, the company reported an operating margin of 8.2% in Q4, down from 14.4% in a year-ago quarter.
Analysts reached a consensus estimate of $2.92 EPS for the first quarter of 2022, down 22.24% year-over-year. However, a $7.95 billion average revenue projection for the current quarter implies a 10.94% increase year-over-year.
Roku released its most recent earnings report on Wednesday, November 3rd. In Q3, the company’s revenue increased by 50.5% year-over-year to $680 million, primarily driven by an 82% year-over-year increase in platform revenue to $583 million. However, ROKU slightly missed Wall Street estimates by $0.82 million. Its GAAP EPS has been reported at $0.48, beating estimates by $0.41.
It is also important to note that the number of active accounts grew 22.6% year-over-year to 56.4 million in the third quarter. Also, streaming hours came in at 18.0 billion, up 21.6% from a year-ago quarter.
For the fourth quarter, Wall Street expects Roku's EPS to decelerate 92.02% year-over-year to $0.04. But its revenue is estimated to lift 37.99% to $896.76 million in the fourth quarter.
Comparative Valuation
Roku presently trades with a Forward P/E of 101.22x, which is significantly higher than NFLX, whose multiple is currently 35.57x. However, both streaming companies look overvalued compared to the sector's median of 18.04x.
In terms of the Forward EV/EBITDA multiple, ROKU's multiple of 43.51x is about 70% higher than Netflix's 25.61x. Both multiples are above the sector’s median of 9.21x as well.
Conclusion
While both Netflix and Roku should benefit from the online entertainment industry growth in the long term, I believe that Netflix is a better buy at current levels. Although subscribers' growth concerns remain, Netflix's financials and growth prospects look more convincing. Finally, Netflix looks relatively cheaper from a valuation standpoint.
NFLX shares were trading at $404.63 per share on Tuesday morning, up $8.06 (+2.03%). Year-to-date, NFLX has declined -32.83%, versus a -6.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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