The Streaming Wars Have One Clear Winner

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

This wasn’t a great week for several cult favorite stocks.

I’ll discuss a few of them in the Cannabis Corner but first, we need to talk about why Netflix Inc. (NASDAQ:NFLX) spent so much of this week on the defensive. Part of the reason is that the Walt Disney Company (NYSE:DIS) launched its streaming video channel, Disney+, on Nov. 12, and its stock soon thereafter soared as much as 7 percent as people began talking about its new shows.

Netflix, meanwhile, sank 4 percent before recovering its balance. It is clear that Wall Street is convinced that the shift from conventional cable programming to an on-demand video world will have clear winners and losers. There just isn’t room in the American budget to support all the premium channels, whether they come from Disney, AT&T Inc. (NYSE:T) subsidiary HBO or Alphabet Inc. (NASDAQ:GOOG) property YouTube… much less Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL).

Granted, each channel might cost only $4 to $10 a month, but those subscription fees add up. And realistically speaking, even if the dollars are available, there are only so many hours a day every family can spend glued to the screen.

Every hour Disney captures is an hour that Netflix can’t justify as part of its monthly fee. While millions of families will cheerfully flip back and forth, some will look at the annual cost and drop one service or the other.

We know the audience is limited. And Netflix has already admitted that subscribers aren’t loyal enough to pay extra to keep getting the shows they love.

The last fee increase shook the channel’s subscriber retention rates. Anything more will probably start the exodus.

Meanwhile, those other channels beckon. How many services will a family really watch? Streaming video is revolutionary because it finally lets us pay for only the channels we’ll use, but it also ensures that if nobody watches, the channel will find it harder and harder to pay for eye-catching shows.

When the shows find a loyal audience, it’s a virtuous cycle. Otherwise, as Netflix is finding out, the math gets vicious. The company already is spending $3.5 billion more than it takes in to produce its shows.

That’s a big gamble that the investment will pay off. Apple has deep enough pockets to buy Netflix, its audience and its programming slate outright. Disney and Amazon have plenty of other businesses throwing off enough profit to subsidize their shows.

Netflix now lives and dies according to the amount of buzz its shows generate. If I were in CEO Reed Hastings’ seat, I’d be looking for partnerships with other media companies… even if that means entertaining merger offers.

The Real Winner is Clear

But your favorite streaming channel really depends on your favorite shows. It is like rooting for a sports team.

The real winner of the streaming wars is now evident. I took a lot of grief over the summer for backing Roku Inc. (NASDAQ:ROKU) instead of the giants, but since that stock is up 29 percent this week alone, I feel extremely vindicated now.

You should know the argument. I hope you’ve already figured out your strategy on the stock, whether that’s a short-term trading relationship or a buy-and-hold approach for the long haul.

Roku will move just about any streaming channel’s content from the computer to the big-screen television that still serves as the focal point of so many living rooms. With this company’s technology, “internet TV” becomes simply another form of TV entertainment.

Selling the devices is practically a sideshow at this stage. The real commercial engine here is the advertisements and platform fees Roku bundles into its interface.

Think of all the streaming players as channel operators. They’re the new century’s version of CBS, ABC and NBC.

Roku is the cable carrier that supports all the channels and makes money around the menu that helps you flip back and forth. And as we know, cable stocks have made investors extremely wealthy in the past.

There are no real competitors here. While Apple has its TV device, it’s happy to push its shows through Roku as well. Which would you rather use: a gadget that only gets one channel or a remote control that cycles through all the programming available?

I’m thinking Roku will ultimately beat Apple TV in terms of space on the coffee table. If not, Apple is free to buy its much smaller rival and absorb the technology into its own platform.

Roku is the kind of stock I talk about every week in GameChangers. Netflix is not. One has endless growth potential and the ability to soar 29 percent in any given week. The other is Netflix.

Click here to learn about what GameChangers can do for you.

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