Top media analyst recommends investors put on a pair trade of buying Roku, selling Netflix

Published Wed, Dec 9 202010:58 AM EST

(This story is for CNBC Pro subscribers only.) Shares of Roku are surging to all times highs after a top media analyst once again recommended buying shares of the streaming platform, while ditching shares of rival Netflix . Needham's Laura Martin, one of the top analysts in the internet and entertainment space according to TipRanks , just came out with her annual pair trade for 2021: buy Roku and sell Netflix. The call has helped shares of Roku jump nearly 7% to record levels on Wednesday. A pair trade is a short position, in this case Netflix, set up alongside a long position, in this case Roku, with two related companies. Needham has an buy rating on Roku and an underperform rating on Netflix. "We believe that 2021 will unmask fundamental weaknesses in NFLX's growth story and also unmask ROKU's powerful advertising growth engine on its larger installed base, which COVID-19 pulled forward by a year, we calculate," Martin told clients. Shares of Netflix have rallied nearly 60% this year as the streaming giant emerged as major beneficiary of the pandemic. However, Netflix's stock took a hit after the company's third-quarter results showed weaker-than-expected earnings and subscriber additions, a miss that Martin called ahead of time. Martin has remained bearish on the Reed Hastings-led streaming giant, which she expects will lose any 2020 momentum in the new year. "NFLX's subscriber growth in 2020 was aided by several factors that will not persist in 2021," said Martin. The absence of sports, the closure of movies theaters, new content, and shelter-in-home orders with schools and works closed are all going to slow Netflix's growth, Needham explained. "NFLX's sub base will fall (our view) in 2021 owing to the reversal of most positive drivers mentioned above, plus many consumers exhausted their NFLX ques during 2020," Martin added. "In what way does NFLX garner value from its 'market leadership' if a new streamer like Disney+ can enter the streaming market and garner 1/2 as many subs in 12 months as NFLX garnered over 10 years. We expect discovery+ trajectory to be more like Disney + than NFLX, further undermining the valuation support for NFLX as a 'market leader'," said Martin. Netflix's rally is second to the 144% gain in Roku's stock this year. Martin said Roku's upside in 2021 will be driven by a 32% rise in the installed base and an acceleration of "streaming-only homes" that advertisers must reach to retain and grow their market share. Needham noted that Roku's installed base did accelerate in 2020 but the economic power of the base was muted this year due to advertising weakness during the pandemic. "Roku's Biggest Problem pre-COVID was not consumer adoption. It was advertiser adoption," said Martin. "During the pandemic, this gap closed dramatically." "This structural pivot primarily benefits [advertising-based video on demand] competitors, although ROKU benefits from both advertising and subscription revenue growth, as it takes a 20% to 30% revenue share of any revenue made on its platform. In addition, ROKU has lower investment risk owing to revenue stream diversification," added Martin. Martin has a 67% success rate and her picks have generated an average return of 28.8%, according to TipRanks. — with reporting from CNBC's Michael Bloom.

The Roku 3 television streaming player menu is shown on a television in Los Angeles, California, U.S., on Thursday, Sept. 12, 2013.

Patrick T. Fallon | Bloomberg via Getty Images

(This story is for CNBC Pro subscribers only.)

Shares of Roku are surging to all times highs after a top media analyst once again recommended buying shares of the streaming platform, while ditching shares of rival Netflix.