Cord-cutting accelerated during the pandemic, as a record number of U.S. households cancelled cable and satellite services, according to eMarketer. However, there are still more households with pay TV than households that have never had pay TV, meaning the shift toward streaming entertainment could be far from over.
At the same time, linear TV ad spend is expected to exceed $67 billion in the U.S. in 2021, while connected TV ad spend will total just $13 billion. Again, these statistics suggest that we are still in the early days of streaming adoption.
In this Backstage Pass video, which aired Sept. 14, 2021, Motley Fool contributors Jason Hall, Trevor Jennewine, and Demitri Kalogeropoulos discuss three stocks that should benefit from this trend.
Jason Hall: Here's what I wanted to ask you guys though. Whether it's Apple or whether it's another stock, thinking about streaming, thinking about that opportunity, Trevor, kick us off, what's your favorite stock right now?
Trevor Jennewine: So as far as streaming goes, I'm going to go with Roku (ROKU -3.08%). Maybe not the most common pick, but Roku, I think, benefits from streaming in general. The platform is the most popular connected TV streaming platform in the United States and Canada. Its market share in the U.S. is 38% in terms of streaming or Smart TVs, and 31% in Canada, and then globally, through the second quarter, Roku devices accounted for 30% of all streaming time on a global basis -- the next closest competitor, with 18%, was Amazon's Fire TV -- so a leader there. One of the things that's helped the company maintain that position or even grow its position is the acquisition of Dataxu back in 2019. So it bought a demand-site platform, Dataxu, and then rebranded as Roku OneView. This is basically the ad-tech that helps advertisers buy ad inventory on Roku's ad-supported content.
It helps marketers launch and measure targeted ad campaigns across desktops, mobile devices, connected TVs, and then measure and optimize those campaigns over time. The company has had a lot of success, and that's one-half of the reason I like Roku. The other reason is the company is now exploring their original content. They've always had The Roku Channel, which is their own ad-supported streaming service, which gives them ad inventory to sell and they are now moving into original content. They acquired the Quibi content earlier in the year, they launched Roku Originals earlier in the year, and from what management has said, there has been a lot of engagement.
In the two weeks following the launch of the first Roku Originals, they saw record streaming on the Roku platform. I think, from broad perspective, that Roku benefits from streaming in general, the company works with Netflix (NFLX -1.80%), Disney+, all the other paid premium subscription products out there, as well as a bunch of ad-supported products like Hulu. So as streaming becomes more popular, I think Roku's business will grow. If there was one thing that I think people should keep an eye on or one worry that I might have is I do think a lot of this hinges on their content strategy. If all they're doing is licensing content, I don't think that creates a very big moat, and I think people can replicate that business model pretty easily. But if they have something original content-wise that differentiates them, I think that can help them maintain their market-leading position. What do you guys think?
Jason Hall: Yeah. I think you're onto something. So this is largely considered like this kind of a service agnostic provider and they get a piece of so many other companies business that are in this space. Their leverage has grown substantially, we saw that with some negotiations with some pretty big hitters over the past year. If they can develop even a little bit of original content that resonates, it could be great here. Demitri, I love the one you're going to talk about because this is like a winner that's going to continue to win, right?
Demitri Kalogeropoulos: Right. Yeah, this is going to be new. I'm sure you've heard of it if you're in The Motley Fool, down here it's Netflix. I like the stock, I've liked it a long time. It got a little bit more controversial this year. The stock just recently revisited its, I think, all-time high, hitting around $600 a share this past week, but it's been in the high $400s just a couple of months ago. People are nervous about slowing growth, subscriber growth, Netflix pulled forward so much membership gains into late 2020, and they are dealing with a little bit of a hiccup there too, and also that's being a bit amplified by a content policy that they had to do last year. But I like Netflix and I still think it has room to run. The two things I want to highlight with that is cash flow and its margins.
It's on track this year to have its first year of sustainably positive cash flow, and that's really exciting for this business. It was burning two billion dollars a year just two years ago. It's exciting to see that. It's actually, I believe, it's a good bet on if people are interested in inflation-proof kind of a stock, I think Netflix has a lot of room to raise its prices over time. You just look at what Disney's been able to charge for just a couple of premium movies that it puts out. I think that's proof that Netflix, I don't think they'll necessarily go that model, but it shows that there is a lot of value in that content.
The other thing is, like I said, the operating margin is just amazing, the way the company just manages the business to boost their profit margins by, they've said a few years ago, three percentage points every year and they've just hit that like clockwork. That just recently hit 25% of sales last quarter, and that number was double-checked, it was below 6% just in 2017. That tells me there's a lot of earnings power to come from Netflix and it's just really starting to profit from that leadership position in this really exciting industry.
Jason Hall: I think you hit on a couple of things, there's pricing power, there's also cost advantage too because they already have so much great own content. I think not just inflation-resistant, but also recession-resistant. So if there's another economic downturn, a lot of these other platforms that rely on ad spend to generate revenue could see that affect their earnings during recessionary periods. People are going to keep paying their $12, $15 a month for Netflix, I think that's a really powerful part of its business that's easy to overlook. So I really like that and I like that this is a stock, and this was number 20 on the mega rankings of stocks to make investors money over the next five years.
There's a lot of consensus across the Fool from people like Andy Cross, Tom Gardner, Aaron Bush, they like this stock too. So I think that's a good one. I'm going to go bold here, guys, and I'm going to go with a small-cap company, less than $600 million, small-cap, Curiosity Stream (CURI -1.86%). It's been recommended in a couple of Real-Money portfolios. I really like where this business is positioned. So it's a really small business that's just getting started. Unlike Netflix which had a profitable and an economic model that could make money, and was cash-flow negative because it was throwing all of that money back into building out its content library, Curiosity Stream doesn't make enough money to cover its operations right now.
So this is a bet ongoing from start-up getting to sustainability. The founder of this business whose name just jumped out of my head. What's his name? The founder of Discovery Channel. He's the founder of this business, he's the chairman. So talking about fact-based content, think about great documentary programming, this is their niche. They have two ways to make money from it. The big thing, the most important thing is getting people like you and me to subscribe, to pay that few dollars a month, to $10 a month, to $100 a year for their different tiers to have access to this great, high-quality, fact-based content.
They also have some corporate partnerships as well, so you get on a flight and you're going to watch something on the back of the screen in front of you, selling content to airlines and other corporate partners, and that sort of thing. The biggest number to focus on with this very small company though is user growth. This is where you want to see it, and here's what we saw last quarter. In the second quarter of last year paying subscribers. Last quarter grew to 20 million. That was 40 %year-over-year increase. That's a real positive. There's some lumpiness in its cashflows because of some partnership revenues that it got, so we didn't see the same revenue growth, but as we get through the end of the year, management raised its revenue outlook for the full-year to 80 %revenue growth for the full-year. Guidance is showing good.
You look at gross margin, gross margin increased to 63% versus 61%. Again, as the business is losing money, they have to get to scale with a very high rate of growth and they have very high margins. You combine those things and eventually if the scale is large enough, this can be a really profitable business. I like Curiosity Stream a lot. If you're looking for high-risk, high rates reward could be 10 bagger or better business if there is a big enough opportunity in the executes and they execute well.
