Ten years ago, the streaming wars were a one-horse race, with Netflix being the only player to consider. Nowadays, there are at least 14 streaming stocks to consider.
In this post we introduce the prominent streaming stocks, and consider which ones might win the streaming wars and which stocks are worth investing in.
- Introduction to the video streaming market
- The most important streaming stocks
- Other streaming stocks
- Picking stocks in the streaming space
Introduction to the video streaming market
We recently covered SaaS stocks which offer software as a service via the cloud. The term SaaS can also refer to companies offering service as a service, one of which is on demand streaming videos or music. These services allow their subscribers to watch TV shows and movies whenever they want, rather as dictated by a schedule. These services can be accessed on smartphones, notebooks, tablets, and smart TVs.
Over the last decade, consumers have been cancelling their cable and satellite TV contracts in favor of streaming services. In fact, globally, there are now more streaming subscriptions than cable TV contracts. Soon streaming subscriptions will outnumber cable and satellite contracts combined.
Ten years ago, Netflix was the only notable streaming service. But as Netflix began to gain traction, broadcasters like Comcast saw the writing on the wall, and began to roll out their own streaming video services. Tech giants like Apple, Amazon and Tencent have also entered the market.
The COVID-19 pandemic caused several investment megatrends to accelerate in 2020. The pandemic benefited companies that support remote working and education. TV streaming stocks and gaming stocks have also benefited as people have been forced to find entertainment options while staying at home. While streaming stocks have benefited from the pandemic, they are also benefitting from long term trends and have further room to grow.
The most important streaming stocks
The following stocks are the most important stocks competing in the streaming wars.
- Netflix, Inc (NFLX)
- The Walt Disney Company (DIS)
- AT&T, Inc (T)
- Comcast Corporation (CMCSA)
- iQIYI, Inc (IQ)
- Amazon.com, Inc (AMZN)
- Apple, Inc (AAPL)
- Roku, Inc (ROKU)
- Fubo TV, Inc (FUBO)
Netflix, Inc (NFLX)
Netflix is the world’s leading on demand video streaming provider. The streaming service allows users to watch a vast array of movies, documentaries, and TV shows in a variety of languages. The company buys content to distribute, and also produces original content, available exclusively to subscribers. Netflix has actually been one of the top performing stocks in the world over the last two decades. The share listed in 2002 at around $1.15 and now trades at over $500 – a gain of over 48,000%.
Netflix now boasts more than 200 million subscribers around the world, with 74 million in the US market. Until now growth has been funded by issuing new shares. The company now expects to be cash flow positive and will not need further funding from investors. Annual revenues are now close to $25 billion. This gives the company a big budget to produce original content and puts it in a strong position to win the streaming wars.
Furthermore, Netflix also intends to begin a stock buyback program which will provide some support for the stock price. The risk is the stock valuation. Netflix is trading on a trailing earnings multiple of 94, and a sales multiple of 9.4. This would make the stock vulnerable if earnings growth slows, or if market volatility increases.
The Walt Disney Company (DIS)
Disney’s subscription video streaming service, Disney+, was launched in 2019. Right from the start Disney was expected to be the best contender to eventually win the streaming wars, apart from Netflix. This was largely because Disney already owns a large content library including Disney and Pixar classics, Star Wars, and The Simpsons. Disney also owns ESPN and HULU, which are now available bundled with Disney+. This significantly reduces the amount Disney needs to spend on buying or producing content.
Of course, Disney also owns movie studios, media networks and theme parks like Disneyland. Nevertheless, Disney+ was always expected to be the major growth driver as subscriber numbers would be growing from a low base. So, at the beginning of 2020, Disney’s stock price was expected to perform well compared to Netflix.
The pandemic, which forced people to stay at home, gave Disney Plus an unexpected boost, and subscriptions grew to 87 million in a little over a year. However, its theme parks were forced to close, movie production was put on hold and revenue from cinemas all but dried up. The net result was that gross revenue fell about 25%, but the contribution from the streaming business quickly grew to 29% of total revenue.
Disney now owns a significant streaming video business, and the remainder of its business segments should revert to normal later this year. This is why the share price is trading at all time highs, despite the company reporting large losses in the last two quarters. The company is also carrying quite a lot of debt which was issued to make acquisitions and to fund the development of Disney+. Disney is trading on a forward multiple of 38, which is slightly lower than Netflix, but assumes Disney’s other business units will return to normal in the next six months.
AT&T, Inc (T)
In May 2020 HBO entered the streaming wars with its HBO Max streaming service. HBO (Home Box Office) already has a big following due to the high-quality TV shows it produces – including Game of Thrones, The Sopranos and Westworld. The service already has 38 million subscribers. HBO is owned by Warner Media Studios, which is in turn owned by AT&T. HBO only accounts for around 4% of AT&T revenues, so unfortunately the service is unlikely to have a big impact on the share price.
Comcast Corporation (CMCSA)
Comcast Corporation launched its streaming video service, Peacock, in April 2020. The service falls under NBCUniversal and streams content form NBC’s library. There is a free ad-supported tier, while premium subscribers will soon have access to NBC sports and WWE content. NBC’s hit show, The Office, will also be available on Peacock soon. Peacock is notable in that it includes news content, something other channels do not.
The service now has 33 million subscribers, though most of those are for the free tier. However, the company only expects Peacock to become profitable in 2024. Comcast had a terrible year in 2020 as it lost out on revenue from theme parks which were closed and advertising from sporting events, like the Olympics, which were postponed. In the long run Peacock may well save Comcast from the effects of cord cutting and falling ad revenues. But gains from Peacock are likely to be offset by falling revenue elsewhere in the business.
iQIYI, Inc (IQ)
Dubbed the Netflix of China, iQIYI offers various online services, including streaming video in China. The stock is also listed on the Nasdaq, which means it is accessible to US investors. iQIYI boasts 120 million subscribers, making it one of the largest streaming stocks in the world although those numbers may not be directly comparable to a company like Netflix. Its revenue grew rapidly from 2016 to 2019, but stalled in 2020, with subscriber numbers also falling.
The company is also burning cash quickly, despite the slowdown in growth. As it stands, iQIYI appears to be one of the riskier streaming stocks. However, both Tencent and Alibaba have expressed an interest in investing in the company. If these companies do invest, it may provide support to the share price.
Amazon.com, Inc (AMZN)
Amazon’s streaming video service is Prime Video. Standalone subscriptions are available but are also included with subscriptions to Amazon Prime. Prime video gives subscribers access to original content as well as widely syndicated content. This broader service includes streaming music, Kindle books, gaming, access to exclusive deals and free, faster deliveries. The full Amazon Prime subscription is $12.99 a month, while Prime Video on its own is $8.99 a month.
Amazon Prime also benefited from global stay at home orders in 2020 and total subscriber numbers reached 150 million. However, the subscription segment still only accounts for around 6% of total revenue. Within this segment Prime video is more of a value add than a growth driver in its own right. So, Amazon is unlikely to win the streaming wars, though there are lots of other reasons to invest in the stock.
Apple, Inc (AAPL)
Apple is in the process of complimenting its hardware business with a range of services available on monthly subscriptions. These include streaming music and video, apps, games, books, and fitness programs. Standalone subscriptions are available for all of these services, but they also come bundled together under Apple One. Apple TV+ is the streaming video service. Subscribers can watch videos on Apple devices, on smart TV’s and via streaming devices. Apple produces original content and several TV shows have won awards. Besides original content
It is estimated that the service has as many as 40 million subscribers. However, many of those subscribers received one-year subscriptions when they bought an iPhone or MacBook. It’s likely the number of paying subscribers is far lower. Like Amazon, it’s debatable whether Apple really falls into the streaming stocks industry because its streaming services make up a relatively small percentage of total revenue. Its market tends to be limited to owners of Apple devices. While Apple TV+ certainly adds value to the Apple ecosystem, it is not really a competitor in the streaming wars.
Roku, Inc (ROKU)
Roku sells streaming media players and set top boxes. These allow users to stream content from most well-known streaming video providers, including Netflix, Disney+, Peacock.
Roku also has its own channel, which is free and supported by ads. While most streaming services are SVOD (subscription video on demand) Roku’s own channel is an AVOD (ad supported video on demand channel. This is a new trend in the streaming space, but one that is rapidly gaining momentum. As cable TV continues to decline, Services like Roku are the best alternative advertisers have. Roku is also a little like a Facebook or YouTube for TV in that ads can be targeted to specific consumers.
The fact that Roku is compatible with all the other streaming providers is also an advantage for investors. The company can grow regardless of who ultimately wins the streaming wars. This is one of the reasons Roku has been the best performing of all the streaming stocks over the past 18 months. The downside for Roku is the valuation. Roku trades at 35 times sales and has yet to break even. While the company’s prospects are good, its stock price may be quite volatile over the next few years.
Fubo TV, Inc (FUBO)
Fubo TV is a streaming service that distributes a wide range of sports channels, as well as movies, TV shows and news channels. The service has 545,000 paying subscribers. While the subscriber numbers are much lower, its charges subscription fees as high as $79.99 a month, compared to $5 to $15 for other services. The company is also smaller, with a market capitalization of just $5 billion.
Fubo’s stock price has been extremely volatile lately. The lockup period for company insiders expired in December. Anticipation of insider selling and some concerns about the core business model led several Wall Street hedge funds to open short positions. The stock price fell nearly 40% in matter of days but was then targeted by retail traders along with GameStop, AMC and other heavily shorted stocks. The short squeeze resulted in Fubo’s stock rallying over 50%.
Despite the short squeeze, there is another unique argument to be made for Fubo. Sports betting is now allowed in 12 US states, with more states expected to allow it in the future. Fubo is in the process of acquiring Vigtory, a sports betting platform – which will be integrated with the streaming platform. The combination of streaming sports and sport betting gives Fubo tremendous potential. Nevertheless, the stock should be treated as speculative until the new business model has been proven.
Other streaming stocks
There are five other streaming stocks that we haven’t detailed because video streaming just isn’t a big enough part of their business, or because they are struggling to grow their subscriber base.
Listed companies like Viacom, Inc (VIAB), CBS Corporation (CBS) and Discovery, Inc (DISCA) have also launched streaming platforms. However, subscription growth has been slow, and streaming is too small a part of their revenue for them to really be contenders in the streaming wars.
China’s Tencent Holdings (TCEHY) owns several successful streaming video platforms. However, these platforms are very small in the greater scheme of things for the company. In Europe, Nordic Entertainment Group AB (Stockholm: NENT.A and NENT.B) which is based in Sweden operates a streaming platform across the Nordic region. Growth over the last few years has been slow, but the company may be worth watching in the future.
Picking stocks in the streaming space
There are two things to consider when stock picking in the streaming industry:
Subscription prices are low with most plans priced at $5 to $15. This means streaming services can coexist, and some consumers already subscribe to three or four different services. So, their doesn’t need to be just one winner in the streaming wars. At the same time, streaming companies need to achieve a certain level of scale to produce enough good content to be considered by consumers. While three or four streaming platforms can coexist, it’s unlikely that six or seven can be viable over the long term.
In this respect, Netflix already has a massive advantage with $25 billion in annual revenue. Disney also has an advantage because of its large catalogue of content. The other content production studios and broadcasters like HBO and Comcast are going to have to catch up quickly – and any gains they do make are likely to be offset by revenue declines in their legacy businesses.
Roku and Fubo TV are slightly more speculative but are definitely worth considering. These two streaming stocks have unique strengths and do not require the scale of companies that produce their own content. However, investors in these stocks will need to be prepared for volatility. These smaller players are also likely more likely to achieve the status of multibagger stocks going forward.
For Apple, Amazon and Tencent, video streaming adds value to the overall businesses, but is not reason enough to invest in the businesses. Nevertheless, they are worth keeping an eye on as their success will affect the ability of other companies to compete. Streaming stocks definitely deserve a place in any asset allocation mix. However, like most tech stocks, streaming stocks are trading on very high valuations at the moment. A market correction would provide a better entry.
Conclusion: Which company wins the streaming wars?
Investors really don’t need to pick one streaming wars winner. Netflix, Disney, Roku and Fubo TV can all perform over the long term and holding all four stocks reduces the risk of trying to pick one winner. Unfortunately for the smaller players, it will be difficult to catch up.