Best Stock to Buy Right Now: Disney vs. Roku

These two media and entertainment businesses deserve a closer look.

The media landscape is undergoing a major transformation. That’s due to the rise of streaming entertainment, a new way to consume content that is resulting in households ditching their cable subscriptions and cutting the cord.

Two businesses trying to find success in this space are The Walt Disney Company (DIS -0.63%) and Roku (ROKU -0.34%). The former, a global entertainment powerhouse, has seen its shares tank 51% off their peak price. The latter, a streaming platform, trades 87% below its all-time high.

Which of these beaten-down stocks is the better buy right now?

The case for Roku

Despite macroeconomic headwinds, Roku continues putting up healthy growth. In the first quarter of 2024 (ended March 31), revenue jumped 19% year over year, with the active-account base rising 14% to total 81.6 million. Engagement remains strong as consumers streamed a whopping 30.8 billion hours of content on Roku during the last three months.

This company is well positioned to benefit from the streaming secular trend. It aims to be an agnostic platform that is compatible with any streaming service. For viewers, Roku aggregates all of their content choices into one simple user interface. For content companies, like Disney or Netflix, Roku provides broad distribution.

And for advertisers looking to target a connected TV audience, Roku provides the technological platform to do so. In fact, the business has top-market share in the U.S., Canada, and Mexico when it comes to smart TV operating systems. As ad dollars shift over to streaming, Roku should benefit.

Because the stock has gotten so crushed, it trades at a compelling valuation. Investors can scoop up shares at a price-to-sales (P/S) ratio of 2.4. That’s a steep 75% discount to its historical average of 9.7. For long-term investors who want exposure to the streaming landscape, Roku might be a top candidate.

The case for Disney

Disney is in a challenging spot, to be clear. Its linear-cable channels, notably ABC and ESPN, are still generating profits. But they are in secular decline as households cancel their cable TV subscriptions. According to eMarketer, just under half of all households in the U.S. still had cable packages in 2022, a figure that is estimated to drop to 35% penetration by 2027.

CEO Bob Iger and his team are trying to position the business for a streaming future. The company’s combined streaming services (Disney+, Hotstar, Hulu, and ESPN+) have 228.6 million paying members. Disney+ Core (excluding Hotstar) alone has 117.6 million. This easily makes it one of the leading streaming services on the market.

As the company ramps up its streaming services with tech and content investments, operating losses have been massive, so management is cutting costs to get to profitability. In 2024’s fiscal Q2 (ended March 30), Disney’s direct-to-consumer division generated $47 million in operating income, which is hopefully the start of soaring profits going forward.

Intellectual property (IP) gives Disney a unique advantage in the entertainment space, as its characters and storylines cannot be replicated. I’m becoming convinced that the business will be able to replace its success in cable TV with success in the streaming world. Plus, it has thriving theme parks that should keep growing earnings for a long time.

The final word

Both Roku and Disney possess compelling reasons for why their shares should be purchased. If an investor wanted greater exposure to the media sector more broadly, and the streaming industry more specifically, then I see no reason why both companies can’t be owned.

However, if I had to choose one as the better investment over the next five years, I’d go with Disney. In my opinion, its IP creates an economic moat that is hard to match in the entertainment industry. And this gives me confidence that the business will be around for a long time. Plus, it has multiple distribution points to be able to monetize its IP.

Disney is the better stock to buy and hold.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix, Roku, and Walt Disney. The Motley Fool has a disclosure policy.

Source link

About The Author

Scroll to Top