While the coronavirus’ impact on the market has meant, in most cases, a complete meltdown of companies’ value, there have been a number of outliers among the decimated names. Typically, these are the companies that offer the public and investors alike a product or service needed in such times. While no one would argue streaming is as important as a vaccine, some companies providing services in this field have held steady against the overall market’s decline.
Netflix (NFLX), for example. Against the run of play, the streaming giant is up by 10% year-to-date, bolstered by a narrative which suggests more people staying at home equates to more revenue.
But 5-star Needham analyst Laura Martin has been arguing the case against Netflix for a while now and the streaming leader’s durability in such difficult times hasn’t changed her mind. In fact, the analyst rates Netflix shares an Underperform (i.e. Sell). (To watch Martin’s track record, click here)
Martin laid out her case, noting, “We worry about NFLX's balance sheet and potential liquidity woes based on our projection of $2-4B of negative FCF in 2020, coupled with high-yield bond market volatility. Additionally, Antenna data through March 1, 2020 show that NFLX's US net sub adds have been negative for most of the past 12 months, due to price increases and new SVOD competition.”
Instead, martin suggests investors take a look at the streaming universe’s new player, Roku (ROKU). The alternative choice is an interesting one, as lately the phrase “the new Netflix” has been thrown about whenever Roku is in the vicinity.
Unlike Netflix, though, Roku hasn’t been immune to the virus’s impact. Following last year’s run, in which its share price skyrocketed by almost 350%, at the turn of the year, Roku stock was already showing signs of fatigue. Over the last month, alongside the rest of the market, the share price has shed 27% of its value. So, what makes Roku preferable to Netflix, according to Martin?
First of all, Martin argues, Roku should be viewed as an “aggregation platform, similar to iOS and Android in mobile and Facebook in social.” Following up this bold assertion with the claim, “Winning aggregators typically benefit from winner-take-most economics.” No prizes for guessing who Martin thinks the winner here will be.
The analyst also counts a number of reasons why Roku is her streaming player of choice among the two. These include a more favorable valuation, alongside relative balance sheet strength. Additionally, Roku’s role as an aggregator platform provides it with relative pricing power and a preferable competitive position. Martin also adds, that in contrast to Netflix’s fixed monthly fee, Roku’s revenue is tied to viewing growth, with advertising as its primary source of income.
Martin concludes, “Although hours streamed are growing during COVID-19, we prefer Roku, which has a volume-based revenue model (ie, advertising CPMs) based on viewing time rather than NFLX, which charges the same price regardless of hours viewed. Additionally, Nielsen reports 88mm US connected-TV homes with at least one SVOD service. Since NFLX has 61mm paying US subs (ie, 70% of 88mm), we prefer Roku, which has an installed base of 37mm US homes, suggesting more upside potential.”
Martin, therefore, reiterates a Buy rating on Roku, along with a price target of $200. This conveys the analyst’s confidence in Roku surging by an extra 123% in the next twelve months.
So, where does the Street stand on the two streaming players?
Netflix gets a Moderate Buy rating from the analyst consensus, based on 23 Buys, 6 Holds and 3 Sells. Shares in NFLX sell for $357.32, and the $382.90 average price target suggests a modest 7% upside potential. (See Netflix stock analysis on TipRanks)
As for Roku - 5 Buys, 3 Holds and 2 Sells, also add up to a Moderate Buy consensus rating. At $139.40, the Street sees further upside of 43%. Overall, Roku is clearly the winner here. (See Roku stock analysis on TipRanks)
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