The top video-streaming operating system and the world's largest premium streaming service appear to be passing ships. Roku (ROKU 3.32%) stock has more than quadrupled in 2019 and is clearly the market's hottest stock this year. Netflix (NFLX +1.15%), on the other hand, has seen better days. The former market darling is still trading modestly higher this year but is falling sharply for the second consecutive month.
There was a time when it seemed that Roku was riding Netflix's coattails. What was good for Netflix was good for Roku, and there's a fair amount of truth to that. Netflix launched the cord-cutting revolution with Roku as a major beneficiary.
However, we're now seeing that what's bad for Netflix is also good for Roku. Welcome to the new normal, where the coattail hopper is now the one donning the coat.
Image source: Netflix.
A quarter to dismember
Netflix isn't perfect with its quarterly guidance. It's fallen short of its own subscriber forecast once each year dating back to at least 2016.
This year's miss was different. Netflix was targeting 5 million net additions during the second quarter. It only grew its account base by 2.7 million.
One can argue that Netflix boosted its prices here and in several international markets during the quarter. It's only natural for cancellations to spike and for potential subscribers to get cold feet. However, Netflix knew this was happening when it initiated its guidance back in April. It just overestimated its pricing elasticity.
Netflix isn't broken. It's still the best service available with the deepest online catalog on the planet. With more than 151 million streaming paying memberships worldwide on its books, Netflix can spend more on content than any other sustainable model by spreading it across its massive user base. Netflix is still growing despite pushing out four significant price hikes over the past five years.
However, at the moment that Netflix seemed to be overplaying its hand with this springtime increase, it was only natural to wait a couple of weeks later for Roku to report. Was the streaming revolution slowing at just Netflix or was it an industrywide chill?
For now, it's just Netflix that had a disappointing second quarter. Roku closed out the second quarter with 30.5 million active accounts, a 39% surge over the past year. Streaming usage was up 72%, naturally leading to a healthy boost to Roku's average revenue per user.
We're still streaming. Netflix just had a hard time with its new pricing.
The future to remember
Netflix will bounce back. It always does. The thing holding it back is that Disney's (DIS 0.14%) new streaming service is becoming more and more imposing as we approach its Nov. 12 launch date. The media giant is pricing its new streaming service at an aggressive price point of $6.99 a month, and this week, we learned that it will bundle Disney+, ESPN+, and the ad-supported version of Hulu at $12.99 a month. The bundle matches Netflix's most popular streaming plan price point with the added benefit of live sports through ESPN and current TV shows through Hulu.
Netflix has also announced this summer that it will be losing The Office and Friends to two other rival streaming services that haven't even launched yet. Fierce competition for eyeballs is coming, and while the biggest loser will be cable and satellite television providers, it probably means that we won't be seeing a fifth price hike out of Netflix anytime soon.
All of these gray clouds on the horizon for Netflix are actually positive developments for Roku. As the built-in platform of choice for a growing number of smart TVs and with its own device makers experiencing a rebirth in popularity, Roku wins when the industry is expanding.
Big media companies about to roll out new services also means that they will pay healthy ransoms to get noticed through Roku's gateway, unlike Netflix, which doesn't need to pay up to stand out. The disruption at Netflix is the opportunity at Roku, and that's why sometimes you have to ride coattails long enough to afford your own tailor.
