The history of film and television has included a number of different ways that people consume media. However, streaming is now the top dog — and streaming stocks are high in demand.
Once upon a time, there was broadcasting. The big names were ABC, CBS and NBC.
Then, in the 1980s came cable. Turner Broadcasting, Viacom, and Fox were the programming leaders. Behind the scenes were last mile providers like Comcast (CMCSA) and AT&T (T).
However, as I said before, now there’s streaming. The whole TV board has been overturned as the Cloud Czars are coming for your TV set.
The companies that dominated TV for decades are seeing their markets go to the clouds. This includes Comcast, which owns NBCUniversal, AT&T, which owns CNN and HBO, Disney (DIS), which owns ABC and ViacomCBS (VIAC), which owns CBS.
For streaming, the big new networks are Amazon (AMZN) Prime, Netflix (NFLX) and Alphabet’s (GOOGL) YouTube — part of Google. The upheaval is tremendous as channels become streams, and streams seek money from customers.
There is even the prospect of a fourth giant, bigger than all the rest, buying its way to market dominance. (No, it’s not Facebook (FB). Is it?)
For old business models, it’s a twilight zone. So, submitted for your approval, we offer the top streaming stocks out there:
How can a company with sales of $23 billion be worth as much as one with sales of $70 billion? It can only happen in the streaming world.
Consider that cable television costs about $150 per month. Even with its latest price increase, Netflix’s (NFLX) standard offer costs $14 per month. You need a broadband connection to get it, but broadband is now a necessity not just in America, but throughout the global middle class. So, figure that costs $50 per month and Netflix is still a bargain.
In turn, this math has made Netflix the most powerful force in TV history. It’s worth more than any TV network, even worth more than cable giants like Comcast and AT&T.
Disney, even with its theme parks and vast studio history, is worth $260 billion as of now and Netflix is worth $210 billion. Since the start of the year Netflix stock is up more than 47%, and Disney is about flat now.
Overall, Netflix is the better stock. It is the biggest competitive threat Mickey Mouse has faced since Walt Disney ran a small animation house against MGM, Paramount, and the other Hollywood studios of the 1930s.
Netflix had 195 million paid subscribers at the end of September, according to its quarterly report. However, this disappointed investors when it was announced. Meanwhile, Disney bragged it had 60.5 million subscribers to its Disney Plus service when reporting earnings in August. And CEO Bob Chapek thought this worthy of celebration.
Moreover, Netflix also beats Disney with technology. Open Connect, a network topology announced in 2012, reduces Netflix’ last-mile costs, and those of networks delivering it. Netflix’ database means subscribers tell it each day not just which shows they like but which types of shows. It can sign producers under long-term contracts with precise notes on what to make.
Additionally, Netflix gives producers huge audiences. Tiger King was watched by 65 million people, while a great network TV show may draw 10 million viewers. The top Netflix film, Extraction, was watched 99 million times in its first four weeks. That’s comparable to Avengers: End Game, Hollywood’s all-time biggest hit. However, Extraction cost $65 million to produce, while Avengers: End Game was $350 million.
As a whole, Disney and Netflix aren’t in the same league anymore. But it seems like the longevity of content favors Netflix among the top streaming stocks.
In the world of streaming stocks, there’s a price better than Netflix’ $14 per month. The price is free. The biggest growth engine for Alphabet (GOOGL) — best known for Google — is YouTube, its free video service.
In its most recent quarterly report, Alphabet reported it should draw $20 billion in ad revenue this year from YouTube, up 31% from 2019. Google also sells an ads-free version called YouTube Plus, and a “skinny bundle” cable service called YouTube Premium. These should bring in another $4 billion this year.
YouTube is now nearly 20% of Google’s business, and it’s growing three times faster than the rest of the company.
Moreover, YouTube traffic is plugged into Google’s network of 24 cloud data centers. The money comes in through Google’s existing ad network, and the content is submitted for a cut of the ad revenue. YouTube genres like “with me” videos are big businesses in their own right. YouTube creators represent a huge labor force, and new YouTube features are big news.
Google bought YouTube in 2006 for $1.65 billion, when it was little more than a start-up. If founders Chad Hurley and Steve Chen had kept that stock, it would now be worth about $10.5 billion — making YouTube the biggest bargain in the history of media.
If you are buying Alphabet stock for growth, you’re buying YouTube. YouTube is the dominant player in free video as millions of millennials get all their TV through YouTube. Most don’t pay for ads or YouTube Premium. The only player that can compete with it is Facebook’s Instagram, which also has cloud data centers and an ad network.
With new formats, and new ways to earn money like shopping, YouTube has a long “runway” of growth ahead of it.
Even splitting Google’s network of cloud data centers and its ad network from YouTube might not impact it. The service could simply rent these services.
Collectively, YouTube is the biggest threat cable faces because it’s free. Alphabet is currently valued at about 7 times sales. And with YouTube generating nearly $6 billion per quarter of revenue, and growing faster than the main service, YouTube alone is worth $200 billion. Maybe more.
No company has been upended by streaming wave like AT&T (T).
Instead of building cloud data centers, former CEO Randall Stephenson bought satellite broadcaster DirecTv, then cable programmer Time Warner. As a result, AT&T had $153 billion in debt at the end of September, while customers cut their cables in favor of streaming.
Stephenson made what now looks like the biggest business mistakes of all time. Now, Facebook is worth more than two-and-a-half times more than AT&T and former computer giant International Business Machines (IBM), which also missed the cloud, put together.
In early November, CNBC reported that AT&T was thinking of selling big stakes in both DirecTv and Time Warner, as well as its AT&T Now streaming service and U-Verse cable network, to private equity. The offering would value DirecTv at $15 billion after it cost $67 billion in 2014.
Investors led by Elliott Management, which bought a $3 billion block of the stock last year, are demanding action. The proposal would let AT&T maintain control of its assets while giving those investors a quick profit.
If the company were to break up Time Warner, the Cloud Czars would be eager to pounce. Apple would be a natural home for the production businesses and the film library at TCM. Amazon owner Jeff Bezos might like to attach CNN to his Washington Post. If he’s not interested, The New York Times (NYT) might be.
For investors, AT&T does have a compelling value proposition, thanks to its dividend. That dividend yields over 7% in a world where a 30-year bond yields just 1.5%.
What AT&T doesn’t have, though, — even if its proposed partial asset sales go through — is a compelling business proposition. It’s only of interest to momentum traders looking for a bottom or income investors who want to squeeze the monopoly for as long as they can.
It looks like, for now, that AT&T will keep pumping out that dividend until the well runs dry — making it one of the streaming stocks to consider.
Comcast (CMCSA), the cable giant that also owns NBCUniversal, was feeling a lot like its viewers on Election Day. Worried, but hopeful about the future.
The shares currently sit at $47, about 5% above where they started the year. They fell into earnings Oct.29 and kept falling. Most of those numbers were not good, with earnings down 28% and revenue down 6%.
Comcast’s commentary, however, was upbeat. The company added 633,000 Internet customers during the quarter, but it lost 67,000 cable subscribers. The Peacock streaming platform drew 22 million sign-ups, but how many are paid, shareholders asked. Sky TV had a good quarter. That’s a European satellite network like AT&T’s DirecTv, whose value is declining.
What Comcast has going for it is that it represents the last mile of the Internet for millions. It’s the Internet service, launched starting in the 1990s, that is keeping its dividend, yielding 2.1%, alive.
Moreover, this should have been the company’s biggest summer ever. It owns Universal Studios, the NBC TV network, and NBC’s associated cable networks. But the pandemic put off the Olympics, it killed the movie theater business and it closed the Universal Studios parks.
What those who are bullish on the company argue is that this was the low point. Tomorrow is another day, and it should be better. That said, the theme parks should re-open next year and at least break even.
Comcast is also testing equipment that will let it deliver 1 GBPS cable, both uploads and downloads. Streaming ads could also be more targeted than TV ads, the company believes, thus more profitable.
Despite the happy talk, NBC Universal is going through layoffs, with as many as 300 losing their high-paying jobs. Add theme park layoffs, and you’re talking about $700 million in “restructuring” charges, as they’re called. “We have an obligation as our revenue moves down to adjust our cost base,” NBCUniversal CEO Jeff Shell told Deadline, a trade paper. More layoffs will come in 2021 if results don’t pick up.
If this really is the bottom, Comcast is a cheap stock and a buy. It’s priced at less than 20 times some bad quarterly earnings. The yield is attractive with 30-year bonds still paying just 1.54%.
But cord-cutting is continuing. NBC can still be “paid” on “skinny bundles” like YouTube TV Premium from Alphabet, but total TV ad revenue remains flat.
Comcast may be undervalued in the near term, but Comcast is still on the wrong side of the long-term future. That said, speculators and traders may buy it, but long-term investors shouldn’t with this member of the streaming stocks.
There’s a profitable, high-growth niche in the streaming realm. If your hardware and software can give consumers access to the new streaming universe, you can make a lot of money. That’s precisely what Roku (ROKU) streaming sticks and TVs do. It’s the gateway to the new world of streaming stocks.
The stock entered trade Nov. 3 at $207, a market cap of $25.8 billion, on trailing year revenue of $1.12 billion. Growth of 42% was expected when Roku reported earnings November 5. But the company blew by those estimates, with revenue rising 73% year-over-year to $452 million. Within a few days the company’s stock had added over $3 billion to its market cap.
Overall, Roku has two revenue streams: Streaming sticks and other products, like TVs and sound bars, embedded with its software. Then, there is platform revenue, mainly advertising, but also royalties on streaming subscription sales.
That said, platform revenue is now more 70% of the total. And gross margins on that business are 61%. The company’s OneView ad management program, recently updated, leverages data about who is watching to manage advertising on TV, PC and mobile. OneView is the result of Roku buying an adtech company called dataxu last year for $150 million.
The danger is that Roku’s ad network puts it in direct competition with two of the Cloud Czars, Alphabet and Facebook. The chances that Roku might sell out to one of these giant companies is closing because they have chosen to build rather than buy its technology. Google, Amazon and Apple all have their own streaming platforms. Meanwhile, Facebook is preferring to let its Instagram service compete with YouTube, and Microsoft (MSFT) is mostly a business-to-business company.
That leaves buyers like AT&T, Comcast and Disney. Roku is already worth about $10 billion more than ViacomCBS, but the cable powers have the firepower to pay the $40 billion Roku would cost with stock. However, as Roku scales, the dilution looks harder to justify. Roku shares have risen 66% so far in 2020. There are other ad managers out there.
Of the three potential bidders, Comcast seems the most likely having launched its Peacock app on Roku recently. (Amazon is still resisting Peacock.) The move followed long negotiations over control of user data and sharing of ad inventory.
That said, the dispute illustrates Roku’s problem. Roku is, in the end, mainly an advertising platform. It needs cooperation from streamers to justify its stock price.
Moreover, TV analyst Jim Cramer still likes Roku. In addition to ads, he likes the streaming royalty revenue.
However, other analysts are getting nervous. The average price target on Tipranks entering earnings was $190 per share, but that’s lower than it’s at now. Bloggers (that’s what Tipranks calls yours truly) are generally more bullish. Our Chris Markoch is one of the bears as he questions the ad growth story in a world dominated by the Cloud Czars.
Collectively, I’m more worried about Roku’s valuation relative to potential acquirers. Management still sees growth ahead, but it could miss its best acquisition window. If you buy Roku, that’s still your payout. You wouldn’t be paying 20 times revenue otherwise.
One hallmark of the streaming stocks is that the business is so new we don’t know who all the players will be. Yes, Google and Amazon and Netflix.
But, what about Apple (AAPL)? Apple, with a market cap of nearly $2 trillion, is worth nearly 10 times Disney’s $257 billion, 10 times Comcast’s $215 billion and about the same as 10 times AT&T’s $201 billion.
If the problem for Apple TV, or its Apple TV+ streaming project, is a shortage of content, it’s one the company can buy its way out of. Even Netflix , with a market cap of $207 billion, isn’t a serious threat.
However, money is just part of the story.
What matters in streaming is technology. Apple, Amazon, and Alphabet all sell streaming sticks, which turn two-way Internet-fed content into one-way fare for home television. Their only competitor is Roku, which with its market cap of $27 billion holds the position of Switzerland among the great powers.
That said, Apple has mastered the technology. Its remote is top-notch, and its app is also winning praise. Compare the parts to what you have, and there’s no comparison. Whether the Apple TV box itself will survive isn’t important because Apple has the software to win.
Additionally, Apple also has the money. While stars and shows may be worth millions, Apple is worth trillions. Apple TV+ was launched with a $6 billion budget. Apple can outbid anyone for new talent, but it can also be patient. Apple TV+ has a knock-down price of $5 per month, which beats almost every streamer out there. You can bundle it with music and gaming starting at $15 per month.
Apple can wait for the market to fall into its lap because it charges a publisher’s share of 30% for every game, song or TV show that wants to reach Apple’s market. And while many have complained, only Epic Games — backed by China’s TenCent Holdings (TCEHY) — has been willing to go to court over it. That said, initial court rulings favor Apple.
Moreover, Apple is not the only company taking this walled-garden approach to its hardware market. All game platforms, including those of Sony (SNE) and Microsoft, take the same approach.
Overall, the question for investors is how much does this mean? In its September quarter report, Apple was getting almost 20% of its revenue from services. It now has 10 cloud data centers, with more on the way. Apple’s content gold rush has just started, assuming it can keep the app store model proprietary.
So, while the streaming sector may be worth billions of dollars in sales, Apple has trillions of dollars in market cap to work with.
At the time of publication, Dana Blankenhorn had long positions in AAPL, MSFT and AMZN.
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