The streaming video market is more competitive than ever. Roku (ROKU -5.38%) and Warner Discovery of the brothers (WBD -3.88%) are there two companies in the space with very different business models, but which stock will do better for your portfolio? Read on to see why two Motley Fool contributors are on different sides of the debate.
The case of Roku
Parkev Tatevosyan: My investment thesis for investing in Roku is based on the structural advantages of streaming over cable. Roku partners with manufacturers to sell TVs compatible with the Roku operating system. Once in the ecosystem, Roku takes a percentage of all consumer transactions on the platform. Additionally, Roku earns a portion of advertising revenue from users of the Roku operating system.
Already, Roku has the best streaming operating system in the United States. In the process, Roku gained 61.3 million active accounts as of March 31, an increase of 7.7 million from the same period a year earlier. Its average revenue per user (ARPU) in the quarter that ended in March rose to $42.91 from $32.14 a year earlier. Roku is adding millions of new customers and earning more from each. Its net revenue increased to $2.8 billion in 2021 from $513 million in 2017.
The short term might be volatile for Roku as it grapples with economic reopening headwinds, but it has a tailwind at its long-term back. The structural advantages of streaming over cable and satellite are unlikely to reverse. It’s not like consumers are ever going to wake up and say they prefer less convenience, less value and less flexibility.
One of the only reasons to be hesitant about Roku’s stock is its expensive valuation. With a price-to-earnings ratio of 87.6, Roku shares aren’t cheap. However, if it continues to grow in user count, ARPU, and overall revenue at the rate it has been, it could only be a matter of time before it grows in its rating.
Don’t Underestimate This New Media Giant
Keith Noonan: Roku has a great business model, and I think the stock looks like a great long-term buy at current prices. However, I don’t think investors should sleep on Warner Bros. Discovery.
HBO Max has a solid lineup of premium content, CEO David Zaslav has done an incredible job building the discovery side of the business, and the company also has key advantages over streaming-only players. While the current market leader netflix is limited to subscription sales and the revenue it can generate from its upcoming ad-supported service, Warner Bros. Discovery still has theatrical and legacy TV distribution channels and a strong merchandising business. These other ways to generate revenue also help the company justify production budgets for the type of premium content that seems increasingly important in the ever-changing streaming market. The company also offers strong live sports content and a highly successful video game business.
With the US economy likely entering a recessionary phase and Warner Bros. Discovery recently announced that it would be laying off 30% of its advertising staff, so it’s no surprise the title has been struggling lately. The shares are now trading down around 41% from their price when they began trading in the market after the merger in April. Even in the tough broader market environment, this is a precipitous drop in such a short time, and the big sell-off has created an interesting opportunity for investors.
Warner Bros. Discovery has one of the strongest content libraries in the entertainment industry. It also has the advantage of having a wide variety of creative studios capable of delivering content to suit a wide variety of audience tastes and budget levels, and the title seems to have some great potential after recent sales.
So which stock is the best buy?
Roku and Warner Bros. Discovery could offer strong returns at current prices. For those looking for potentially explosive growth games, Roku is probably the most attractive candidate. Meanwhile, Warner Bros. Discovery is trading at multiples that put it in high-value territory. Unless you want to hold a position in just one streaming player, it’s worth considering both stocks.
Keith Noonan holds positions at Warner Bros. Discovery, Inc. Parkev Tatevosian holds positions at Netflix. The Motley Fool holds posts and recommends Netflix and Roku. The Motley Fool recommends Warner Bros. Discovery, Inc. The Motley Fool has a Disclosure Policy.