Four stocks to watch in the streaming wars

The landscape is going to become fiercely competitive, as new and established players jostle for subscribers, advertising dollars, and market dominance

Vikram Barhat 23 October, 2019 | 1:13AM

Man watching streaming service

As another earnings season gets under way investors are closely watching profit and revenue trends to make, or recalibrate, their long-term investing decisions. The spotlight is particularly sharp on the video streaming market, set to explode with the launch of much anticipated services of heavyhitters like Apple  and Disney in November.

The streaming landscape is going to become fiercely competitive as new and established players jostle for subscribers, advertising dollars, and market dominance while wooing more consumers away from cable TV.

Gaining and retaining brand-agnostic subscribers, though, may not be a cakewalk, as Netflix discovered in recent months. By all indications, it’s likely not going to be a winner-take-all battle. Whether competing on price or content slate, global and regional players will have to duke it out in a marketplace that’s only going to get crowded. As the race heats up, accelerating the shift from linear TV bundles to over-the-top (OTT) delivery and fuelling market growth, investors may want to keep leading streamers on their screen for any buying opportunities to ride the rising tide of digital entertainment.

Netflix Inc

 

Ticker

NFLX

 

Current yield:

-

 

Forward P/E:

52.36

 

Price

US$277.28

 

Fair value:

US$135

 

Value

104% premium

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

*

Data as of October 18, 2019

Video streaming giant Netflix (NFLX) is the current global leader in over-the-top (OTT) on-demand content delivery. The company, which pioneered streaming content, introduced the concept of binge-watching, and currently boasts more than 158 million subscribers globally.

To offset slowdown in the U.S. subscriber growth, the streamer is ramping up its international operations, excluding China, luring new subscribers with localized content and lower-priced plans. “Already the largest provider in the U.S., Netflix has expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside,” says a Morningstar equity report.

Netflix’s competitive advantage stems from scale and a network effect resulting from large consumer data. The firm tracks every customer interaction and analyses that data “to better purchase content as well as finance and produce original material such as ‘Orange Is the New Black’,” says Morningstar equity analyst, Neil Macker, who puts the stock’s fair value at US$135.

Apple Inc

 

Ticker

AAPL

 

Current yield:

1.31%

 

Forward P/E:

18.15

 

Price

US$235.40

 

Fair value:

US$200

 

Value

18% premium

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

**

Data as of October 18, 2019

King of the hill in the premium smartphone market, Apple (AAPL) is quickly ramping up its services segment to diversify its revenue away from the hardware segment (iPhones, iPads and MacBook), which is experiencing a slowdown in growth. More recently, a strong push into the video streaming video market has become a big part of Apple’s growth strategy.

In September, the tech behemoth announced the launch of its gaming service, Apple Arcade, and its independent video streaming service, Apple TV+, which rolls out on Nov 01. Priced at US$4.99 a month, much lower than its competitors, AppleTV+ will be free for a year upon purchase of a new Apple device. The ad-free service will be launched in more than 100 countries and will offer original programming featuring high-profile names including Oprah Winfrey and Jennifer Aniston.

With hardware becoming increasingly commoditized and replacement cycles potentially elongating in the long term, we expect Apple to focus on newer software and services to augment the user experience and retain customers,” says Morningstar sector strategist, Abhinav Davuluri, who appraises the stock to be worth US$200.

Amazon.com Inc

 

Ticker

AMZN

 

Current yield:

-

 

Forward P/E:

48.78

 

Price

US$1763.88

 

Fair value:

US$2300

 

Value

23% discount

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

****

Data as of October 18, 2019

Online retail behemoth Amazon (AMZN) rang up US$233 billion in sales and amassed US$408 billion in estimated global gross merchandise volume (GMV) in 2018. Amazon, whose online and digital media sales account for 53% of revenue, also offers movies and TV shows through Amazon Prime Video service.

In the U.S. alone, the company has clocked more than 100 million paid subscribers for Prime, of which Prime Video is a part, making Amazon the second-largest video streaming service provider in the country.

Internationally, Amazon is locked in a fierce battle with Netflix in India, one of the fastest growing streaming markets, driven by cheap data and increased smartphone usage. Like its rivals, Amazon is rapidly localizing its content to win over viewers in India, still a vastly untapped market.

“We believe Amazon will continue to develop into a formidable player in digital media, given its vast content offerings [and] inroads into new verticals (including video games),” says Morningstar sector strategist, R.J. Hottovy, who pegs the stock’s fair value at US$2,300.

The Walt Disney Co

 

Ticker

DIS

 

Current yield:

1.33%

 

Forward P/E:

23.36

 

Price

US$131.37

 

Fair value:

US$130

 

Value

Fairly valued

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

***

Data as of October 18, 2019

Legacy entertainment heavyweight Walt Disney (DIS) makes live-action and animated films under studios such as Pixar, Marvel, and Lucasfilm, and operates media networks including ESPN and several TV production studios. The House of Mouse recently added a new segment, direct-to-consumer and international, which includes two OTT offerings: ESPN+, and Disney+.

The Disney+ SVOD service will be competing with Netflix, Amazon Prime Video, among other global and regional streaming players. The aggressively priced US$6.99 a month service will boast a formidable content slate including some of the biggest blockbusters from its Marvel, Pixar and Disney studios.

The push into streaming is heralded by a Morningstar equity report as “the transformational leap into direct to consumer (DTC) with the launch of Disney+ in November.”

The firm’s DTC efforts -- Hulu, ESPN+, and Disney+ -- will leverage the new content created at Disney’s television and film studios as well as the deep libraries to successfully transform its business and to establish industry dominance. “We estimate 22% annual growth for the new DTC and international segment as we are modeling strong subscriber growth for Disney+,” says Macker, who estimates the stock to be worth US$130 and forecasts the service to hit 55 million subscribers by 2023, driven by “a strong international rollout and continued low prices for the service in the U.S and internationally.”

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc1,745.53 USD-0.41
Apple Inc263.19 USD-1.16
Netflix Inc305.16 USD0.85
The Walt Disney Co146.93 USD-0.98

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.