Streaming has become the dominant mode of content viewing today, accounting for more than a third of total viewing hours, according to data company Neilsen. The largest players continue to duke it out for the top spot, but there are several different forms of streaming and different leaders in various segments.
Disney (DIS -0.02%) is one of the leaders in premium streaming, while Roku (ROKU 4.61%) is one of the leaders in ad-supported streaming. Both of these companies have other parts to their businesses. Which is the better stock to buy today?
Disney: A lot more than streaming
Disney has a robust streaming unit that, without ESPN, took in $5.6 billion in the 2024 fiscal second quarter (ended March 30), or about a quarter of total sales. Considering it didn't exist a few years ago, that's a major leap. Streaming continues to chip away at traditional viewing, like broadcast TV and cable. As the largest entertainment company in the world, Disney is leading this revolution.
Disney has an edge over other streamers through its several film and content-creation studios. The company's creatives have developed an unmatched content library with beloved characters and franchises that feed the various content channels.
Streaming isn't profitable yet, but without the ESPN part, streaming was profitable in the second quarter for the first time, with $47 million in operating income. Management is keeping guidance steady for full-year profitability for the entire streaming operation.
Unfortunately, some of Disney's other assets are casualties of the shift toward streaming. It still has linear networks, like ABC, that previously accounted for a chunk of revenue through its advertising business, and these have been slowly fading. Linear-network sales were $2.8 billion in the second quarter, an 8% decrease year over year, and operating income fell 22% in the quarter. Part of this is that the overall advertising industry is facing a tough time with inflation, but the trend started way before.
Finally, Disney's parks remain a key part of its overall strategy. The parks segment increased 10% year over year in the second quarter, and Disney's making some big moves to invest in its parks.
How do parks relate to streaming? All of Disney's businesses work together to leverage its characters and franchises to create a uniquely Disney experience for fans. Each part works to amplify the whole, and viewers who love streaming content could end up at Disney World to heighten their experiences.
This is a well-oiled model that breeds a cycle of success, which is why Disney has such a compelling business.
Roku: The top streaming platform
Roku, unlike Disney, is wholly focused on streaming. But it uses a different model than Disney and other premium streaming companies.
First and foremost, it has a streaming operating system (OS). It makes hardware, and anyone who buys one of its streaming devices gets an account with Roku to start watching. Roku has the top streaming OS in the U.S., Canada, and Mexico, and it's making strides internationally.
This is a compelling model, as well, because it leads to a system that's greater than each one of its parts. As accounts grow, so does interest from advertisers, leading to higher sales. The device business is much smaller than the advertising business, accounting for 14% of sales in the 2024 first quarter, but as you can see, it plays an essential role in growing the business.
Sales are growing well and were up 19% in the first quarter, driven by strength in both the device and platform segments. Roku added 1.6 million households in the quarter for a total of 81.6 million, a 14% increase over last year, and streaming hours were up 23%. These are strong numbers that are important for advertisers to see.
The main problem for Roku right now is profitability. It briefly became profitable at the height of the pandemic when everyone stayed home and got a streaming account somewhere. That seems to imply it can be profitable at scale, but it hasn't been able to repeat that yet.
Gross margin has been pressured for the past few quarters, coming from both segments. However, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has turned positive and is growing. Free cash flow is also moving in the right direction and came in $468 million in the first quarter.
There's no near-term outlook for net profitability, but when it happens, Roku should be a formidable streaming player.
Which stock is the better buy today?
This is a tough contest. Each of these companies has something to offer investors, and each is struggling to some degree right now.
Let's compare their valuations. Since Roku isn't profitable or expected to become profitable in the near future, I'll use the price-to-sales ratio. With that metric, they're both quite similar at around 2.
Both of these stocks are down from their highs, but investors are giving Roku a much harder time. It's down about 40% this year, while Disney stock is up 12%.
I think Disney stock is more of a sure thing, and as streaming becomes profitable, investors will continue to reward it. The company should provide steady gains for investors over the long term.
If you have more of an appetite for risk, you might want to go for Roku stock. It might take longer, but the potential looks enormous. If you buy today, you could see massive returns.
