3 Top Streaming Stocks

How these online offerings could put investors in primetime position

Vikram Barhat 27 January, 2021 | 4:38AM

 Netflix logo on television set

The world was already transitioning from cable TV to over-the-top (OTT) streaming content, but the pandemic really hit ‘fast-forward’ on the trend. With people spending more time at home, streaming demand has skyrocketed. Shuttered cinema halls and a multitude of other preventative measures against the spread of COVID-19 are expected to continue to create a tailwind for leading streaming service providers and boost revenues.

As a result, legacy entertainment giants are scrambling to roll out new streaming services to take on burgeoning digital streamers. Content producers are also ploughing billions of dollars into creating or procuring shows to beef up their content arsenal, lure new subscribers, and stay ahead of the competitive curve. As the OTT subscriber growth continues to outpace traditional, a trend industry experts claim will not reverse even in the post-pandemic world, it has started to upend traditional ways of doing business. The intensifying streaming war is prompting players to make some very bold moves including raising subscription fees, signing Hollywood heavyweights, as they jostle to gain greater control of the rapidly expanding streaming market, projected to grow 24% annually between 2020 and 2027.

The following streaming stocks are set to profit substantially as rapid adoption of smartphones and cloud-based services, and an accelerated consumer shift to streaming platforms drive revenue growth. Further, a combination of larger subscriber data set and machine learning provide key insights that these content providers will leverage to purchase and create better content to tighten their grip on the Subscription Video on Demand (SVOD) market.

 

Netflix Inc
  Ticker NFLX
  Current yield: -
  Forward P/E: 59.88
  Price US$565.17
  Fair value: US$250
  Value 126% premium
  Moat Narrow
  Moat Trend Stable
  Star rating *
Data as of Jan 22, 2021

Steaming pioneer, Netflix (NFLX) offers streaming video-on-demand service worldwide except China. From its humble origins as a DVD rental service, Netflix has morphed into a streaming behemoth in the U.S. and is fast gaining subscribers internationally.

The company’s recent earnings report showed Netflix had racked up a whopping 200 million subscribers globally by the end of 2020, up 22% from 167 million a year ago, boosted by rising demand in international markets and the pandemic-led home confinement. The subscriber growth is particularly impressive given the company has been consistently raising the price of its plans while competing against cheaper alternatives from rivals.

“Already the largest provider in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside,” says a Morningstar equity report, stressing increased customer penetration in international markets will “generate average revenue growth of 14% in Europe, 12% in Latin America, and 21% in the Asia-Pacific through 2025.”

The rapid subscriber growth further boots its already substantial consumer data, markedly larger than that of its rivals. “Netflix's data set is and will remain significantly larger due to the size advantage of its subscriber base and the amount of time spent on the service,” says Morningstar equity analyst, Neil Macker, adding Netflix leverages this customer data to refine its content offerings to make them more appealing to subscribers.

Prompted by a strong 2020 performance, Macker recently raised the stock’s fair value from US$200 to US$250. He forecasts U.S. subscriber growth to reach 78 million (from 64 million currently) and international base to hit 300 million by 2025.

 

Amazon.com Inc 
  Ticker AMZN
  Current yield: 3.25%
  Forward P/E: 7.35
  Price US$18.40
  Fair value: US$30
  Value 41% discount
  Moat None
  Moat Trend Negative
  Star rating ****
Data as of Jan 14, 2021

Ecommerce juggernaut, Amazon (AMZN) is the world's highest-grossing online retailer, with US$281 billion in net sales in 2019. Online and digital media sales, which includes movies and TV shows through its streaming services Amazon Prime Video, accounted for 50% of revenue in 2019.

“Aided by more than 540 million estimated global active users, more than 175 million global Prime members [of which Prime Video is a part] and an unrivalled fulfillment infrastructure, Amazon owns one of the wider economic moats in the consumer sector and is likely to reshape retail, digital media, enterprise software, and other categories for years to come,” says a Morningstar equity report.

The tech heavyweight is the second-largest video streaming service provider in the U.S., after Netflix, and is rapidly expanding its subscriber base in other parts of the world, battling local and global streaming rivals. Amazon scooped up a large share of subscribers during the pandemic as homebound consumers flocked to digital entertainment to fight boredom.

“We expect average annual revenue growth of 22% for the next five years due to greater engagement among Amazon Prime members, digital content sales, international expansion (both established and nascent markets), and emergent business segments like advertising and technology licensing,” says Morningstar equity analyst, Zain Akbari, who puts the stock’s fair value at US$3,630, prompted by the view that “Amazon will benefit from increased demand for entertainment content, either directly (its own content portfolio) or indirectly (AWS functionality for Netflix and other content providers).”

Amazon, he asserts, boasts a strong competitive position in the consumer sector and is likely to reshape retail, digital media, and other categories for years to come.

 

The Walt Disney Co
  Ticker DIS
  Current yield: -
  Forward P/E: 84.75
  Price US$172.19
  Fair value: US$140
  Value 23% premium
  Moat Wide
  Moat Trend Stable
  Star rating **
Data as of Jan 22, 2021

The House of Mouse, Walt Disney (DIS) makes live-action and animated films under studios such as Pixar, Marvel, and Lucasfilm, and also operates media networks including ESPN and several TV production studios. Disney’s direct-to-consumer and international segments include recently introduced SVOD offerings -- its sibling streaming service Disney+ and ESPN+.

The legacy entertainment behemoth is aggressively transforming its business to adapt to the new media and entertainment landscape and consumer preferences. “As part of its global battle with Netflix, Disney is launching a general entertainment content offering under the Star brand,” says a Morningstar equity report. “Instead of a global standalone service, the Star content will be placed into Disney+ under a Star banner in Europe, Canada, Australia, New Zealand, and Singapore.”

As wide-moat Disney transitions to a streaming future, its direct-to-consumer offerings (Disney+, Hotstar, Hulu, and ESPN+) are taking over as the leading drivers of long-term growth. “The streaming will benefit from the new content being created at Disney and Fox television and film studios as well as the deep libraries at the studios,” asserts Macker, who expects “Disney+ will continue to leverage this content to create a large, valuable subscriber base.”

The company’s Disney+, along with its owned platforms of Hulu and ESPN Plus, had reached a combined total of 137 million subscribers by December 2020. “This owed partially to the continued stay-at-home mindset, which meant increased screen time for many; plus, with movie theatres either at reduced capacity or closed entirely, Disney had to pivot to releasing new films via streaming,” says Macker, who recently raised the stock’s fair value from US$127 to US$140, prompted explosive subscriber growth.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc3,094.53 USD-1.64
Netflix Inc547.82 USD-0.51
The Walt Disney Co193.94 USD-0.53

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.

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