1 Streaming Stock to Buy Hand Over Fist, and 1 to Avoid

This is something of a golden age of streaming services. There are more of them than ever before — more than 200, according to some estimates. However, streaming likely hasn’t peaked. Even in countries where the market enjoys solid penetration, like the U.S., streaming captures less than 50% of television viewing time monthly. So there is substantial room for streaming companies to grow worldwide, and some of them could deliver outsized returns to their investors.

Which ones will they be? Let’s consider one streaming stock that looks like a long-term winner and another that isn’t so attractive: Roku (ROKU 4.05%) and fuboTV (FUBO 3.82%).

The streaming stock to buy: Roku

Roku hasn’t performed well in the past few years. It first dealt with a slowdown in the advertising market, and even after this ordeal, the company’s financial results failed to impress investors. The streaming giant remains unprofitable, while its average revenue per user (ARPU) has stagnated.

What, then, makes Roku an attractive long-term option in the industry? Despite stiff competition from Amazon and other notable players, the company is still the leader in North America’s connected TV (CTV) market.

As of the end of the second quarter, Roku had 83.6 million households, an increase of 14% year over year. Roku is building a network effect. The more streaming services it offers through its platform, the more attractive it becomes to people. And as engagement deepens on the platform, Roku’s ecosystem also becomes more appealing to advertisers.

Roku’s financial results should improve eventually. The company’s ARPU remained flat year over year at $40.68 in Q2 because it is focusing on growing its presence in international markets.The company isn’t yet working on monetization in these regions. That will come later.

Roku is following a blueprint in international markets that is somewhat similar to the one that has made it successful up until now: Focus on scale first, even if it means selling its namesake devices at a loss. Once it has a deep ecosystem of users in place, it can unleash various monetization efforts. That is Roku’s path to profitability.

The company’s platform segment, where it records advertising revenue, is profitable on an operating basis. Roku’s device business — sales of its streaming player — operates at a loss.

Once the focus switches from scale to monetization globally, things should improve on the bottom line. They are already moving in the right direction. In Q2, Roku’s net loss per share was $0.24, compared to the net loss of $0.76 reported in the year-ago period. It is worth holding on to the company’s shares until it turns a profit and beyond. Roku is poised to deliver strong returns to patient investors.

The streaming stock to avoid: fuboTV

fuboTV is a streaming platform that focuses primarily on live sports. Though it is a notable company in this niche, it has several problems.

First, because of the seasonal nature of its primary offering, some customers may sign up for the services for several months only to cancel for the remainder of the year. The result is that fuboTV tends to make more money in the third and fourth quarters. While not a deal breaker, this seasonality may make it more difficult for the company to grow consistently over the long run.

Second, fuboTV’s content-related expenses remain high, which prevents the company from being profitable even on an operating basis. In Q2, fuboTV’s revenue increased by 25% year over year to $391 million. Subscriber-related expenses came in at $326.5 million, up 20.5% year over year and eating up about 83.5% of the company’s top line by itself. Some might argue that fuboTV has improved on this front. True enough. However, it still faces significant challenges.

The company’s subscriber growth has slowed in recent years. In Q2, fuboTV had 1.5 million North American subscribers, up by 24.2% year over year. What the company calls “rest of world” subscribers were up 1.3% to 399,000. In Q2 2022, North America and rest of world subscriptions for the company increased by 41% and 130% year over year, respectively. How much can fuboTV continue growing its subscriber base to deliver consistently strong financial results for a while?

Lastly, fuboTV faces competition from providers with larger budgets and more popular brands — think of ESPN, to name just one. More might emerge. fuboTV is in an antitrust legal battle with The Walt Disney Company, Warner Bros Discovery, and Fox, which are looking to launch a sports-focused streaming platform called Venu. If this venture is allowed to proceed, it will almost certainly severely disrupt fuboTV’s subscriber and revenue growth.

Can the smaller fuboTV permanently distinguish itself in this niche, even with competitors — and would-be competitors — like those? Maybe, but I wouldn’t bet money on it, especially as there are other more promising streaming stocks to consider buying. That’s why it’s best to stay away from fuboTV.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon and Roku. The Motley Fool has positions in and recommends Amazon, Roku, and fuboTV. The Motley Fool has a disclosure policy.