We delve into 2 stocks benefiting from the cord-cutting trend that despite Wall Street's concerns could be a top investment today.
Jan. 15, 2022
The number of people canceling their traditional cable packages in favor of streaming services continued steadily for many years. However, the cord-cutting trend accelerated during the pandemic, and some reports suggest that over 80% will not return to traditional cable packages. We delve into two stocks that continue to benefit from this secular tailwind to buy now.
Netflix: Bull vs Bear arguments:
Netflix (NASDAQ: NFLX) started life selling and renting DVDs before turning its attention to streaming, and the rest is history.
Despite its size, the company continues to grow with revenue growth of 16% year-over-year to $7.5 billion in Q3 2021 and a profit of roughly $1.45 billion. It also attracted 4.4 million paid subscribers in the quarter, undeniably helped by 'Squid Game' success which has "pierced the cultural zeitgeist", according to co-CEO Reed Hastings with Netflix now boasting 214 million paid subscribers globally.
Beyond streaming, the company has also entered new markets such as gaming and selling merchandise. Its merchandise and many of its games are related to hit shows, demonstrating its intellectual property's increasing importance and value. Although these new avenues bring some risk, it would undoubtedly move the needle if Netflix executes successfully.
There is no such thing as "too big to fail", and Netflix will have to continue to produce content and incur development costs to try and retain and attract subscribers. There is also rising competition from players such as Disney.
Netflix continues to dominate in the space and is a relatively safe bet to gain exposure to the streaming trend.
Roku: Bull vs Bear arguments:
Roku (NASDAQ: ROKU) manufactures smart TV devices that are either embedded into a TV or plugged in via an HDMI cable. The company is founder-led by Anthony Wood and is sitting well below its all-time highs.
Rather than competing with streaming players, Roku makes its money by selling hardware and facilitating other streaming services. Through this strategic positioning, it has benefitted from the cord-cutting revolution and increasing ad revenue, with platform revenue growing by 82% YoY to $583 million. In total, revenue came in at $680 million, representing a growth of 51% YoY in Q3, along with posting a profit of $68 million.
The company is expanding further into Latin America and Europe, which should help to increase the number of active accounts. It has previously proven its ability to expand successfully internationally after becoming the number one streaming platform in Mexico since entering in 2015.
However, investors should keep an eye on supply chain issues that management stated will persist in 2022. This has already impacted hardware sales and may have a longer-term knock-on effect on platform sales. The number of active accounts has also slowed recently, so expansion internationally will be critical to its success.
Roku appears to be an attractive buying opportunity over the long term, given its recent sell-off, provided you have a relatively high appetite for risk.
