Growth stocks can be volatile. Sometimes they are beloved market enthusiasts, with stock prices soaring on the wings of speculation and exciting business prospects. Just a few months later (or sooner), the same companies can be found in the proverbial bargain bin, as investors look for stability and proven profits in times of crisis. This corner of the stock market is not for the faint of heart.
But the same volatility that might make me reach for antacids can only pave the way for incredible long-term gains. When the stock of a great fast-growing company is on sale, it’s time to buy.
On that note, let’s take a look at a duo of previously high-flying stock market enthusiasts who have been swooning lately. One stock is almost back to its former highs, while the other is down a chilling 88% in three years. I’m talking about Netflix (NASDAQ:NFLX) And Roku (NASDAQ: ROKU)the service and platform masters of the media streaming universe.
This is why you should add Roku and Netflix to your portfolio and keep them forever, for all intents and purposes. Spoiler alert: both companies still have a lot of growth to do.
A thriving media market
Let’s start with Netflix’s “long-term vision.” This document, found on the company’s investor relations website, outlines Netflix’s long-term business plan in detail. It also provides an overview of the streaming market as a whole.
It’s actually a simple vision. Linear TV systems such as cable, satellite and broadcast services are past their prime, and alternatives to streaming video are taking over on a global level. The streaming experience is “on-demand, personalized and available on any screen,” freeing consumers from the tyranny of broadcast schedules or digital video recorder programming. The streaming market itself is growing as more and more people gain access to broadband internet connections and suitable viewing equipment. Ultimately, the old-fashioned linear TV experience should become a rarely used novelty, leaving the trillion-dollar media market squarely in the hands of streaming media services.
Netflix’s unwavering leadership
Netflix is the reigning champ in the streaming world. With a subscriber base of 270 million accounts – comparable to the population of Indonesia, the fourth largest country in the world – Netflix has established a dominant position in the market. About a year ago, Netflix shifted to focus more on profitability, much to the delight of analysts and investors.
I mean, the initial reaction was panic, as the company abandoned its long-held focus on optimized subscriber growth in search of more profitable options. But the benefits of the new strategy became apparent in the coming quarters, and Netflix’s stock is back at all-time highs.
Roku’s rising power
Roku is still in the early stages of its growth story, as a scrappy underdog with a lot of potential.
The company has not yet transitioned to a profit-first strategy, but remains focused on global growth and attracting more users. Netflix is a key partner in this quest, alongside any streaming service hoping to make a dent in the streaming market.
Netflix has been a global business since 2016, but Roku has been almost exclusively an American growth story so far. The company doesn’t even report its international operating results, with one interesting exception. About 79% of long-lived assets are in the United States, 17% are in Britain and the remaining 4% are in ‘other countries’. It’s a big world, and Roku has only just begun its plans for global expansion. Current areas of focus include Canada, Mexico and Germany. Other first world markets will follow, and the ultimate ambition is to go global.
Of course, Roku’s success isn’t guaranteed. Rivals include local heroes in each target market, as well as deep-pocketed tech giants led by Fire TV executive Amazon (NASDAQ: AMZN) and Chromecast/Google TV mastermind Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). But if the trendsetting U.S. market is any indication, Roku appears poised to enter about half of the 1.8 billion households in the global media market. That’s a far cry from Roku’s current market footprint of 81.6 million accounts.
Recovery of the digital advertising market
Both Netflix and Roku are well positioned to benefit from the expected recovery in the digital advertising market. Roku’s stock price has been negatively affected by the decline in digital ad spending, but as the market recovers, the company should post significant gains in ad revenue. Additionally, Netflix’s recent introduction of ad-supported streaming tiers opens up new revenue streams, further improving its growth prospects.
Advertising sales make the business world tick, and these companies are ready to help it turn.
The mature market leader and the undervalued turnaround story
Netflix is like the wise elder in the streaming world. It knows the game, has proven its staying power and offers stability and steady growth. With the shift to a profit-oriented model, Netflix is a solid choice for investors looking for robust and reliable earnings growth. You would have laughed me off stage in 2019 for such a statement, but things have changed.
In the opposite corner, Roku is the young and hungry upstart. The number of active accounts and lagging revenues are comparable to Netflix’s figures in 2015, just before the service leader went global. This high-octane growth stock looks massively undervalued these days.
I can’t promise that Roku will follow the Netflix playbook to perfection, but the trajectory should be quite similar. And it’s a promising path, too: Netflix has grown its revenue fivefold and delivered a 480% return to shareholders since late 2015. For comparison: S&P500 (SNPINDEX: ^GSPC) The index is only up 160% over the same period.
Whether you prefer the stability of Netflix or the potential mega upside of Roku, these are two stocks you can buy and hold forever. The streaming media market is evolving, with Roku and Netflix at the forefront. You can follow my lead and own them both for the long term as well.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon, Netflix and Roku. The Motley Fool holds positions in and recommends Alphabet, Amazon, Netflix and Roku. The Motley Fool has a disclosure policy.
2 Growth Stocks to Buy and Hold Forever was originally published by The Motley Fool
