Growth stocks can be volatile. Sometimes, they're beloved market darlings, with stock prices soaring on the wings of speculation and exciting business prospects. Just a few months later (or earlier), the same companies may be found in the proverbial bargain bin as investors seek stability and proven profits in times of crisis. This corner of the stock market isn't for the faint of heart.
But the same volatility that might make me reach for the antacids can only set the stage for incredible long-term gains. When the stock of a great high-growth company is on fire sale, it's time to buy.
On that note, let's check out a duo of formerly high-flying stock market sweethearts that have been swooning recently. One stock is almost back to its former highs, while the other stands a hair-raising 88% lower in three years. I'm talking about Netflix (NFLX 0.79%) and Roku (ROKU 4.61%), the service and platform masters of the media-streaming universe.
Here's why you should add Roku and Netflix to your portfolio and hold them forever, for all intents and purposes. Spoiler alert: Both companies have a lot of growing left to do.
A booming media market
Let's start with Netflix's "long term view." This document, found on the company's investor-relations website, outlines Netflix's long-term business plan in great detail. It also offers an overview of the streaming market as a whole.
It's a simple vision, really. Linear TV systems such as cable, satellite, and broadcast services have had their day, and streaming-video alternatives are taking over on a global level. The streaming experience is "on-demand, personalized, and available on any screen," freeing consumers from the tyranny of broadcast schedules or programming digital-video recorders. The streaming market itself is growing as more and more people gain access to broadband-level internet connections and suitable viewing devices. In the end, the old-school linear TV experience should become a seldom-used novelty act, putting the trillion-dollar media market squarely in the hands of streaming media services.
Netflix's unshakable leadership
Netflix is the reigning champ in the streaming world. With a subscriber base of 270 million accounts -- rivalling the population of Indonesia, the fourth-largest nation in the world -- Netflix has carved out a dominant position in the market. About a year ago, Netflix shifted gears to focus more on profitability, much to the delight of analysts and investors.
I mean, the initial reaction was a panic, as the company abandoned its long-held focus on optimized subscriber growth in search of more profitable options. But the upsides of the new strategy became clear over the next few quarters, and Netflix shares are sniffing at all-time highs again.
Roku's emerging strength
Roku is still in the earlier stages of its growth story, like a scrappy underdog with tons of potential.
It hasn't made the switch to a profit-first strategy yet, remaining laser-focused on global growth and capturing more users. Netflix is an important partner in this quest, alongside every streaming service that hopes to make a dent in the streaming market.
Netflix has been a global operation since 2016, but Roku is almost exclusively an American growth story so far. The company doesn't even report its international business results, with one interesting exception. About 79% of its long-lived assets are located in the United States, 17% are found in the U.K., and the remaining 4% in "other countries." It's a big world out there, and Roku is only getting started with its global-expansion plans. Current focus areas include Canada, Mexico, and Germany. Other first-world markets will follow, and the final ambition is to go worldwide.
Roku's success is not guaranteed, of course. Rivals include local heroes in each target market as well as deep-pocketed tech giants led by Fire TV manager Amazon (NASDAQ: AMZN) and Chromecast/Google TV mastermind Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). But if the trendsetting American market is any indication, Roku seems poised to enter about half of the global media market's 1.8 billion households. That's a long way away from Roku's current market footprint of 81.6 million accounts.
Digital-advertising market recovery
Both Netflix and Roku are well positioned to benefit from the anticipated recovery in the digital-advertising market. Roku's stock price has been adversely affected by the downturn in digital-ad spending, but as the market recovers, the company should experience substantial gains in ad-based revenues. Additionally, Netflix's recent introduction of ad-supported streaming tiers opens new revenue streams, further enhancing its growth prospects.
Ad sales make the business world go 'round, and these companies are ready to help it spin.
The mature market leader and the undervalued turnaround story
Netflix is like the wise elder in the streaming world. It knows the game, has proven its staying power, and offers stability and steady growth. With its shift to a profit-oriented model, Netflix is a solid choice for investors looking for robust and reliable profit growth. You would have laughed me off the stage for a statement like that in 2019, but things have changed.
In the opposite corner, Roku is the young and hungry upstart. Its number of active accounts and trailing revenues are similar to Netflix's figures in 2015 just before the service leader launched into a global presence. This high-octane growth stock looks tremendously undervalued these days.
I can't promise that Roku will follow the Netflix playbook to perfection, but its trajectory should be quite similar. And it's a promising path, too: Netflix has quintupled its sales and delivered a 480% return to shareholders since the end of 2015. By comparison, the S&P 500 (^GSPC 0.16%) index is only up by 160% over the same time span.
Whether you prefer the stability of Netflix or the potential mega-upside of Roku, these are two stocks to buy and hold forever. The streaming-media market is going places, with Roku and Netflix in the vanguard. You can follow my example and own both of them for the long haul, too.
