The rising demand for streaming services is driven by consumers' growing preference for on-the-go entertainment and the widespread availability of high-speed internet. Additionally, the increase in remote work and online education has boosted demand in the enterprise and education sectors. Hence, the global online streaming services market is estimated to grow at a CAGR of 26% by 2027.
Additionally, the widespread use of social media platforms as distribution channels for streaming content has greatly expanded market reach and audience engagement. Cloud-based solutions, which enable seamless content access across various devices and platforms, also support the streaming market's expansion.
Against this backdrop, let’s compare two cloud stocks, Roku, Inc. (ROKU) and Spotify Technology S.A. (SPOT), to analyze which streaming stock is more promising.
The Case for Roku, Inc.
Valued at $9.05 billion by market cap, Roku, Inc. (ROKU) is a TV streaming platform. The company operates in two segments: Platform and Devices. Its streaming platform allows users to find and access TV shows, movies, news, sports, and others.
ROKU’s stock has gained 7% over the past three months but plunged 25.3% over the past six months to close the last trading session at $62.77.
On June 12, 2024, ROKU announced Roku Exchange, a TV streaming-first advertising technology solution that connects ad inventory with advertiser demand.
Roku Exchange ensures a direct path between premium ad inventory and the leading programmatic ecosystem in the industry to deliver greater effectiveness for our clients.
Combining ROKU’s premium advertising supply with identity data and AI-driven optimization capabilities, advertisers will be able to maximize the performance of their campaigns, and the process of buying ROKU Media and TV streaming ad placements will be accessible to more buyers.
ROKU’s trailing-12-month levered FCF margin of 22.2% is 162.9% higher than the industry average of 8.45%. However, the stock’s trailing-12-month gross profit margin of 45.3% is 9.9% lower than the industry average of 50.31%.
In the first quarter that ended March 31, 2024, ROKU’s net revenues increased 18.9% year-over-year to $881.47 million. Its gross profit grew 15.2% from the year-ago value to $388.29 million.
The company’s adjusted EBITDA for the quarter came in at $40.86 million versus an adjusted EBITDA loss of $69.08 million in the prior year. However, the company reported a loss of $50.86 million and $0.35 per share.
Analysts expect ROKU’s revenue for the third quarter (ending September 2024) to increase 10.5% year-over-year to $1.01 billion. However, the company is expected to post a loss per share of $0.50 in the same quarter. ROKU surpassed the consensus revenue estimates in each of the trailing four quarters.
ROKU’s POWR Ratings reflect its neutral outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a C grade for Value and Quality. ROKU is ranked #40 out of 52 stocks in the B-rated Consumer Goods industry.
In addition to the POWR Ratings I’ve just highlighted, you can see ROKU’s ratings for Growth, Momentum, Stability, and Sentiment here.
The Case for Spotify Technology S.A.
Valued at $57.76 billion by market cap, Spotify Technology S.A. (SPOT) provides audio streaming subscription services worldwide. It operates through two segments, Premium and Ad-Supported. The company is headquartered in Luxembourg City, Luxembourg.
SPOT’s stock has gained 94.8% over the past nine months to close the last trading session at $290.16. Over the past six months, the stock has surged 41.7%.
In terms of the trailing-12-month asset turnover ratio, SPOT’s 1.67x is 230.6% higher than the 0.50x industry average. Likewise, its $18.71 trailing-12-month cash per share is significantly higher than the $1.55 industry average.
SPOT’s revenue for the first quarter that ended March 31, 2024, rose 9.5% year-over-year to €3.64 billion ($3.97 billion). Its gross profit increased 9.3% year-over-year to €1 billion ($1.09 billion).
Likewise, the company’s net income came in at €197 million ($215.11 million), compared to a loss of €225 million ($245.69 million) in the previous-year quarter. Also, its earnings per share came in at €0.97, compared to a loss per share of €1.16 in the previous-year quarter.
Street expects SPOT’s revenue and EPS for the third quarter ending September 2024 to increase 22.8% and 308.4% year-over-year to $4.37 billion and $1.43, respectively.
SPOT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, translating to a Buy in our proprietary rating system.
SPOT has an A grade for Growth and a B in Quality. It is ranked first out of four stocks in the A-rated Entertainment - Radio industry.
Click here for the additional POWR Ratings for SPOT (Value, Sentiment, Stability, and Momentum).
Roku vs. Spotify: Which Streaming Stock is More Promising?
The streaming market is majorly driven by the rapid digitization of the media and entertainment sector. Additionally, the growing popularity of OTT platform subscriptions and the increasing number of OTT application downloads are contributing to a positive market outlook. Both ROKU and SPOT stand to capitalize on these burgeoning industry trends.
However, SPOT’s higher profitability and strong financials favor it as the better streaming stock pick.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Goods industry here and the Entertainment - Radio industry here.
What To Do Next?
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SPOT shares were trading at $296.34 per share on Friday morning, up $6.18 (+2.13%). Year-to-date, SPOT has gained 57.70%, versus a 16.34% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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