Sell Netflix and Buy Roku, Analyst Says
Actions of Netflix (NASDAQ: NFLX) have done remarkably well this year, having climbed 53% so far in 2020. by Roku (NASDAQ: ROKU) the stock did even better, more than doubling Netflix’s performance and gaining 129%. Going forward, however, their paths will diverge even more, with Roku remaining a buy and Netflix underperforming.
That’s according to Needham analyst Laura Martin. On Wednesday, Martin named Needham’s two stocks “best pair trades” for 2021, being short on Netflix and long on Roku, while keeping it. $ 315 target price on the actions of Roku.
Martin cited several catalysts that she says will drive Roku’s shares up. The acceleration of cord cuts during the pandemic has resulted in more viewers for the platform’s advertising content, to 46 million, up 43% year-over-year. The trend has also driven advertisers to platforms like Roku as a way to respond to these changing viewing patterns. Perhaps more importantly, Roku attracts the younger demographic of viewers most sought after by advertisers.
For Netflix, however, Martin sees a very different future. She believes many of the followers who signed up this year were simply pulled forward, stunting future growth. Also, when sports and live music return, Netflix won’t be as appealing to some viewers. Finally, Martin believes that low-cost competitors who offer live broadcasts – like the upcoming Olympics – will benefit at Netflix’s expense.
While I think Netflix’s growth will slow down from here, I certainly wouldn’t recommend selling. Netflix is the streaming market share leader with 195 million subscribers, remarkable pricing power and steady growth in international markets.
I have no argument regarding the future potential of Roku. In the third quarter, Roku reported revenue that grew 73% year-over-year, mainly driven by platform revenue which jumped 78%, thanks to strong gains in digital advertising, Roku Channel and Roku operating system licenses for smart TVs.
Given the available evidence, I think Martin is only half right.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.