The pandemic lit a fire under the streaming media sector as people stayed home and streamed more TV shows, movies, and songs. Many of those stocks have already generated big gains for investors this year, but they could surge even higher in 2021 and beyond.
The global video streaming market could grow at a compound annual growth rate (CAGR) of 18.3% between 2019 and 2026, according to Valuates Reports. The global music streaming market could also expand at a CAGR of 17.8% from 2020 to 2027, according to Grand View Research.
Therefore, forward-thinking investors should hold a few promising streaming stocks as that market expands. Here are three solid plays on that secular trend that are still worth buying in 2021: Roku (NASDAQ:ROKU), Netflix (NASDAQ:NFLX), and Spotify (NYSE:SPOT).
Roku is the market leader in connected TV (CTV) devices. It’s expected to capture 46.9% of the U.S. CTV market this year, according to eMarketer, thanks to brisk sales of its stand-alone streaming devices and smart TVs. The firm expects Roku’s share to surpass 50% by 2022, putting it comfortably ahead of rivals like Amazon‘s Fire TV.
Roku’s revenue rose 57% year-over-year in the first nine months of 2020. Sales of its lower-margin players, which generated about 29% of its revenue, grew 40%. Sales from its higher-margin software platform, which generated 71% of its revenue from ads and content distribution partnerships, surged 66%.
During the third quarter, Roku’s hardware shipments rose at their fastest rate in over seven years. Its number of active accounts rose 43% year-over-year to 46 million and its average revenue per user (ARPU) grew 20%, but its gross margin contracted as the pandemic throttled its sales of higher-margin ads.
Roku is unprofitable, and its net loss widened year-over-year in the first nine months. Analysts don’t expect it to generate a profit anytime soon, but they expect its revenue to rise 54% this year and another 39% next year.
Roku remains a risky stock, but it isn’t terribly expensive at 19 times next year’s sales — especially when tech companies that are generating slower growth are trading at much higher price-to-sales ratios.
Netflix is the world’s largest streaming video platform by paid subscribers. Its total number of paid subscribers grew 23% year-over-year to 195.15 million at the end of the third quarter, as its revenue and earnings rose 25% and 73%, respectively, in the first nine months of 2020.
Netflix attributes some of that growth to stay-at-home trends throughout the pandemic, but it still expects its revenue and subscribers to both rise another 20% year-over-year in the fourth quarter.
Analysts expect Netflix’s revenue and earnings to rise 24% and 52%, respectively, for the full year. Next year, they expect its revenue and earnings to grow another 18% and 44%, respectively — which are robust growth rates for a stock that trades at 58 times forward earnings.
Netflix could face tougher competition next year as rivals like Disney and AT&T ramp up their streaming efforts. However, Disney and AT&T’s streaming platforms aren’t profitable like Netflix yet, and Netflix’s strong lineup of original content could keep it ahead of the competition.
Moreover, Netflix’s latest price hikes (an extra $1 for standard plans and an additional $2 for premium plans in the U.S.) indicate it still enjoys plenty of pricing power against Disney, AT&T, and other challengers. Those strengths all make Netflix a great all-around play on the streaming market.
Spotify is the world’s largest streaming music platform by paid listeners. Its monthly active users (MAUs) grew 29% year-over-year to 320 million last quarter. Its number of paid subscribers rose 27% to 144 million, while its number of ad-supported MAUs grew 31% to 185 million.
Spotify’s revenue rose 16% year-over-year in the first nine months of 2020, but high content costs and sluggish ad sales throughout the pandemic throttled its margins and resulted in a net loss.
For the fourth quarter, Spotify expects its revenue to rise 8%-19% year-over-year, its MAUs to increase 11%-27%, and for its gross margin to hold steady. Analysts expect its revenue to rise 41% this year and 22% next year, and for its net loss to narrow next year.
Spotify’s stock more than doubled in 2020, but the stock still looks cheap at five times next year’s sales — likely due to concerns about its lack of profits and competition from tech giants like Apple.
However, Spotify’s stable growth in MAUs and paid listeners indicate there’s still plenty of room for multiple streaming music platforms to grow. Its gross margins should expand after the pandemic ends and advertisers ramp up their spending again, while new strategies — including its recent takeover of the podcast tech company Megaphone and its upcoming expansion into South Korea — could generate fresh growth. Therefore, Spotify should remain the top “pure play” on the streaming music market for the foreseeable future.
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