Netflix Is Dragging Roku Down, But Its Issues Are Idiosyncratic

seekingalpha2022-04-25

SummaryAfter reporting its Q1 earnings on 19th April 2022, Netflix's stock plunged by ~36% in a single trading session.Netflix is considered a bellwether for the streaming industry, and so, the sharp ...

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Comments

MIe
2022-04-26
MIe
Netflix roku zoom pandemic boon over
陈河马
2022-04-26
陈河马
Wow
hiiiinvestor
2022-04-26
hiiiinvestor
Nice
twm124
2022-04-26
twm124
Ok n
Goupppppppp
2022-04-26
Goupppppppp
Noted
nywles
2022-04-26
nywles
Please like

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Netflix is about content, and Roku is about TV OS, content aggregation, and Ads.Netflix and Roku have entirely different business models, and both companies are operating at a very different scale. Roku's platform is just incredible, and I see a long runway for growth here.I rate Roku a strong buy at $100.hapabapa/iStock Editorial via Getty ImagesIntroductionAfter reporting a net loss of subscribers for the first time in over a decade in its quarterly report on 19th April 2022, Netflix's (NASDAQ:NFLX) stock nosedived by roughly 36% in a single trading session. Currently, Netflix is down by ~70% from its all-time highs recorded in November 2021. Despite being a mega-cap stock, Netflix has simply imploded.YChartsYChartsOver the last twelve months or so, we have seen a massive valuation contraction for stocks that were deemed to be pandemic plays, e.g., Zoom Video (ZM), Roku (NASDAQ:ROKU), Teladoc (TDOC), and many others. After undergoing a violent valuation re-rating, Roku was forming a base in the $110-$130 zone. However, Netflix's blowup is now dragging Roku down even further.YChartsNetflix is considered a bellwether for the streaming industry due to its industry leadership, scale, and global presence. Hence, a slowdown at Netflix is being construed as a slowdown for streaming. This correlation is leading to losses in shares of other streaming-related companies like Roku, Disney (DIS), Paramount (PARA), etc. While Roku is undoubtedly a play on streaming, both of these companies have very different business models.Netflix's business model is quite simple - monetizing original and licensed content via paid subscriptions. Before making a u-turn on advertising in their latest commentary, Netflix's management has taken a hard stance against entering the Ads business. Here's how Reed Hastings put it back in Jan 2020-Google and Facebook and Amazon are tremendously powerful at online advertising, because they’re integrating so much data from so many sources. I think those three are going to get most of the online advertising business. For Netflix to grow to a $5 billion-$10 billion advertising business, you need to \"rip that away\" from incumbents. Long term, there’s not easy money there.We’ve got a much simpler business model, which is just focused on streaming and customer pleasure. We want to be the safe respite where you can explore, get stimulated, have fun, enjoy, relax — and have none of the controversy around exploiting users with advertising.Source: variety.comNetflix may bring an ad-supported tier to its streaming service soon. However, Roku's platform was purpose-built for digital advertising with the idea that all content will eventually be streamed. As you may know, Roku is entering the content business with 50+ Roku Originals set to launch on 'The Roku Channel' in the next two years. I would say 'The Roku Channel' is a direct competitor of Netflix. However, Roku is much bigger than TRC.AuthorMany people still think of Roku as a low-margin streaming media player business that will be obsolete in a few years with the advent of smart TVs. However, every 1 out of 3 smart TVs sold in the US is a Roku TV (TVs running on Roku's operating system). For years, Roku has been out-competing the likes of Amazon (AMZN), Apple (AAPL), and Google (GOOG) in the TV OS space, and despite being the market leader, Roku is getting no credit for its monopolistic powers as a gatekeeper. Roku also happens to have a rapidly-growing digital ads business line.Simply put, Netflix is a media company. Roku is a digital advertising company.With Netflix's subscriber count reaching saturation levels in the United States, Canada, and EMEA regions, the company is struggling for growth. Recent price increases led to a surprise decline in subscriber count, reflecting weak pricing power. For Netflix, the streaming wars are getting expensive, with multiple deep-pocketed rivals entering streaming and competing aggressively for market share (and subscribers). Rising content costs and a shrinking subscriber base are massive issues for Netflix: In Q1, Netflix's revenues grew by 10% despite losing 200K subs (due to price increases). However, Netflix projected a loss of 2M subscribers in Q2, and if this trend continues, Netflix's revenues could start shrinking in the future. If revenues shrink, content spending will have to shrink, and that would lead to more subscriber losses and so on.Netflix's management is trying to address this threat by cracking down on password-sharing to improve monetization. While management estimates suggest 100M users are using Netflix for free, I think this estimate is probably too high. Then again, an attempt to monetize these users could backfire and lead to further subscriber losses. In my opinion, Netflix's existing subscriber base of 200M users and annual content spend of $20B should enable the company to survive the streaming wars and still be around five years from now. However, this will depend on the quality of Netflix's content, which has been waning recently. With all of this being said, Netflix's issues are very much idiosyncratic, and they have nothing to do with Roku.Roku's content aggregation TV OS platform makes it a winner regardless of the outcome of the streaming wars. Five years from now, Amazon Prime Video and Disney+ could emerge as the top players at the cost of Netflix; Roku will still be a winner. While Netflix has reached saturation in its primary markets, Roku (56.4M accounts) has more room to grow in the US, and it is still only just getting started with its international expansion. Roku's business is centered around advertising, and original content is only a small part of it. Since the company will be financing its content via the free cash flow generated by its advertising operations, I am not concerned about this new business line.In my view, Roku is on track to become a ~$40B per annum digital ads business by 2031. While Roku is not as cheap as Netflix right now, it is the cheapest it has ever been in its history as a public company.YChartsConsidering the fact that Roku is projected to grow revenues at 35% in 2022, with further improvement in margin profile (as revenue mix shifts towards advertising), Roku is an absolute bargain at current levels. Netflix's blowup is dragging Roku down amid a broad sell-off in growth stocks; however, this selling is outright stupid. Roku's business is not impacted by Netflix's issues. Here's my latest work on Roku (find my detailed investment thesis here):Roku Stock: Glorious Opportunity For Savvy Long-Term InvestorsWhile Roku's stock remains in a downtrend, it is looking more and more like a coiled spring. In my view, the buying opportunity here is as good as buying Roku at $27 in 2018. Roku is an incredible business trading at a massive discount to its fair value. At ~$100 per share, I think Mr. Market is presenting us with a once-in-a-lifetime buying opportunity in Roku.Netflix is trading at 18-19x P/E with ~10% sales growth, i.e., terminal growth is priced in here. For the long-term, Netflix could be a decent buy at these levels; however, Roku will be a much stronger business ten years from now, and it is less risky than Netflix due to the inherent nature of its business model. Hence, I strongly prefer buying more Roku over taking a new long position on Netflix.Key Takeaway: Avoid Netflix, Buy Roku.Thank you for reading. 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