Roku Or Netflix – Which One Is Better In The Near Term?

The current COVID-19 pandemic continues to damage companies from different industries as the virus keeps spreading and the hits keep coming. 

While many industries are facing existential issues, the streaming industry is a rare one that is performing relatively well. Social distancing and stay-at-home mandates have predictably increased the consumption of streaming content, resulting in governments in some countries in Europe, Latin America and Asia to ask streaming providers to reduce the quality of their image in order to improve bandwidth capacity for internet service providers.

We'll find out next quarter how the temporary change to society affected the streaming providers, but in the meantime, I thought this was a good opportunity to compare the two largest "pure-play" streaming companies, Netflix NFLX and Roku ROKU, and see who is best-positioned to see earnings growth due to the virus-imposed self-quarantine that one-fifth of the global population is now in. I believe the answer to be Roku.

COVID-19 Outlook

In terms of size, the two companies are not comparable. Netflix has an income approximately 20-times bigger than Roku, thanks in part to its international growth, and it is far more recognizable among consumers. But in terms of debt, Roku is far less reliant than Netflix, with $100 million in debt and $500 million in cash compared to Netflix's $15 billion in debt and $5 billion cash reserve. Those numbers indicate that Roku is more financially stable regarding its capacity to mitigate any negative market movements. 

In terms of business models, Roku is more likely to see an increase in revenue in the near-term than Netflix. Because subscribers pay Netflix a flat rate every month, Netflix will only benefit if the self-quarantines drive subscriber growth. Unlike Netflix, Roku can benefit from an increase in viewing hours because their model includes ad sales.

In general, both companies should benefit from the current situation. The main question for Netflix, the king of streaming, will be regarding its potential of getting new subscribers. On the other hand, the main question for Roku will be how the economic breakdown will influence their ability to sell advertising space and how much companies will reduce their advertising spending.

Of course, we must also not forget that other contenders are also looking for a way to benefit from the sudden growth of consumption. Walt Disney Co DIS has Disney+, Apple Inc AAPL has Apple TV+, Amazon.com Inc AMZN has Prime Video, and Dish Network DISH has Sling TV.  

As the streaming pie increases, all those platforms will likely drive growth for their respective companies. But in the near-term, I like Roku to benefit the most. 

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