In the video streaming market, content is king and consumers are consuming it like never before. As a result, many viewers are cutting the cord on pay-TV and switching to content streaming.
However, according to Nielsen data, streaming represents just 27% of television screen time in the U.S., while linear television represents 63%.
Let us compare two streaming companies: a TV streaming one, Roku, to an online streaming one, Netflix, using the TipRanks Stock Comparison tool, and see how Wall Street analysts feel about these stocks.
Roku has aimed to be a streaming platform that connects viewers, content publishers, and advertisers. The company generates revenues through the sale of digital advertising, content distribution, and sale of its streaming players.
Last week, the company announced its Q2 results with net revenues of $645.1 million, up 81% year-over-year and exceeding analysts’ expectations of $618.54 million. Earnings per share came in at $0.52, compared to a loss of $0.35 per share in the same period of last year. Analysts were expecting an EPS of $0.12.
However, Roku’s Q2 results prompted Wells Fargo analyst Steven Cahall to modestly lower the price target from $519 to $488 (22.7% upside), while keeping his Buy rating on the stock. Cahall pointed out that the company’s net additions of active users and streaming hours seem to be decelerating.
In Q2, Roku’s active accounts rose by 1.5 million, with 55.1 million active accounts at the end of the quarter. According to Cahall, this was still below Street expectations of net additions of 2 million.
Furthermore, the analyst added that while the Street was anticipating streaming of 19.4 billion hours in Q2, users streamed 17.4 billion hours, a miss of 12%.
Callahan is of the opinion that net additions are the stock’s “biggest lever” and the deceleration in the net additions “is likely to cause investors to stop and reassess the potential bull/bear [bull or bear case scenario].”
Still, Roku’s Average Revenue Per User (ARPU) is on an upswing and was $36.46 as of June 30, a jump of 46% year-over-year. Callahan views this positively because of multiple positive developments that underpin the bull case. (See Roku stock chart on TipRanks)
These include a shift from subscriber video-on-demand (SVOD) to advertising video on demand (AVOD), better cost per thousand impressions (CPMs, or the price of 1,000 advertisement views on a web page), and more clients from advertising “(both self-serve and upfront participants) due to the growth in CTV [connected TV] and decline of linear impressions.”
Roku’s focus on advertising revenues has been sharpened further through the acquisition of Nielsen’s (NLSN) Advanced Video Advertising (AVA) business for an undisclosed sum earlier this year.
For analyst Cahall, the reason for the upside on the stock has been a combination of hours watched per user and the expansion of CPM. The analyst added, “ARPU growth continues to impress though, with upside in hours per account per day, monetization per hour, CPMs, and ultimately profits. We think the ARPU story will win the day hence our continued bullish stance (and higher estimates).”
Notably, Roku is looking at increasing the streaming hours by focusing on content. Recently, the company announced 23 original shows that will premiere on the Roku Channel, starting on August 13.
In Q3, Roku has projected revenues of $680 million at the midpoint with adjusted EBITDA of $65 million.
Turning to the rest of the Street, consensus is that Roku is a Strong Buy, based on 13 Buys and 1 Sell. The average Roku price target of $504.86 implies an approximately 33.1% upside potential from current levels.
Late last month, Netflix reported its Q2 results. Revenues were up 19% year-over-year to $7.34 billion, versus analysts’ estimates of $7.32 billion. Diluted EPS came in at $2.97, missing the Street estimate of $3.15. In Q2 of last year, diluted EPS came in at $1.59.
The company finished the quarter with 209 million paid memberships with global net additions of 1.54 million paid members in the second quarter. NFLX said in its letter to shareholders, “COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through.”
In Q3, NFLX has projected revenues of $7.47 billion with an operating margin of 20.7%. Diluted EPS is expected to come in at $2.55 with global paid memberships of 212.68 million, a rise of 9% year-over-year.
However, post the company’s Q2 results, Pivotal Research Group’s Jeffrey Wlodarczak modestly reduced the target price from $720 to $700 (35.7% upside) but reiterated a Buy rating on the stock. The reason for the lowering of the price target was the forecast for Q3 subscriber additions being less than expected.
NFLX has forecast Q3 net additions of 3.5 million while Wlodarczak’s Q3 estimate was of 4.5 million net adds. This has led the analyst to reduce the subscriber forecasts for the second half of the year and beyond, but to increase the estimate for NFLX’s expenses, as the company has forayed into gaming.
Last month, the company announced that Mike Verdu will join Netflix as VP of game development and will report to COO Greg Peters. According to a Bloomberg report, Verdu was earlier Facebook’s (FB) VP in charge of bringing games and other content to Oculus, FB’s virtual reality (VR) headsets.
Indeed, at NFLX’s earnings call, when asked about the company’s key hires in gaming, management replied, “Video gaming, we’re pushing on that, and that will be part of our service, so unscripted, all those things. So think of that as making the core service better. So lots of investment but not a separate profit pool. It’s enhancing the big service that we have.”
The company has also established a foothold in the e-commerce space by launching its first owned-and-operated online retail outlet, Netflix.shop, to sell products directly to consumers. (See Netflix stock chart on TipRanks)
According to analyst Wlodarczak, NFLX seems to be operating in a “virtuous cycle,” with the larger the subscriber base and higher the Average Revenue Per User (ARPU), the higher the company’s original content spend. That, in turn, “increases the potential target market for their service (and reduces existing subscriber churn) + enhances their ability to take future price increases.”
Turning to the rest of the Street, consensus is that Netflix is a Moderate Buy, based on 20 Buys, 7 Holds, and 3 Sells. The average Netflix price target of $602.23 implies an approximately 16.7% upside potential from current levels.
It is important to note here that effectively, both Netflix and Roku are competing for consumers’ time and eyeballs through different strategies. While Roku is bringing in more original content to its streaming service, at the same time, it is also trying to enhance its advertising capabilities to drive higher CPMs.
In contrast, Netflix is also focusing on content but also seems to be eyeing gaming and e-commerce as potential enhancement of its core streaming service.
While analysts are bullish about Roku, they are cautiously optimistic about Netflix. Based on the upside potential over the next 12 months, Roku seems to be a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities