3 Stocks for the Oscars

As the film awards season gets underway, the entertainment industry is all abuzz, with the 80th  Golden Globe Awards ushering in the annual carnival of filmmaking. Up next is yet another high-profile celebration of cinema, the Academy Awards, or Oscars, the most famous and prestigious award in the global film industry.

While the larger purpose of these events is to promote and showcase creative brilliance across aspects of filmmaking, they also bring a spotlight on companies that produce and profit from entertainment content.

Going by their rich bounty of the 95^th Academy Awards nominations, the following entertainment powerhouses represent attractive investment opportunities. These movie makers are well positioned to see a fresh surge in demand for their content, fuelled by Oscar nods and nominations, as well as burgeoning theatre attendance in the post-pandemic world.

Digital entertainment juggernaut Netflix (NFLX) produces and offers streaming video services globally, except China. The firm that pioneered streaming delivers original and third-party content to internet-connected devices. It’s the largest streaming platform in the world with over 220 million global subscribers. 

Over the years, Netflix’s original content has been consistently receiving film festival laurels and commercial success. The company scored big at the 95th Academy Awards nominations, with a haul of a total of 16 nominations — second highest after Disney.

“From its origin 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  “the firm has used its scale to construct a massive data set that tracks every customer interaction.”

Netflix recently initiated an ad-supported tier hoping to capture potential subscribers that were unwilling to fork out the higher ad-free price. “While the potential audience could be large, particularly in emerging markets, management will need to ensure that the lower-priced tier doesn’t cannibalize the full-price subscriber base in more saturated markets like the U.S.,” says Morningstar equity analyst, Neil Macker, who recently raised the stock’s fair value to US$315 from US$290, to account for the benefit of the add-on plan, offset by slightly slower international subscriber growth.

Netflix continued its rebound from a weak first half of 2022, ending the year by adding 7.66 million net subscribers. The streamer has also intensified its crackdown on password sharing as it looks for more revenue-boosting initiatives. 

Legacy movie behemoth Warner Bros. Discovery, (WBD) is one of the largest media firms in the world with tremendous scale and reach. The company owns some of the biggest global networks including HBO, Discovery, CNN, and TLC and well-known franchises like Superman, Rick and Morty, and Game of Thrones. The firm’s content production studios include Warner Bros., HBO, Discovery Studios, DC Films, and Cartoon Network Studios.

The entertainment giant, which also operates two major streaming services, HBO Max and Discovery+, bagged a total of 12 Oscar nominations this year, making it another successful award season for the studio.

The new company, formed by combining WB and Discovery, “will use its combined programming library and production capabilities to drive further growth in its streaming services,” says a Morningstar equity report, adding that the firm is transitioning toward a more direct-to-consumer focused model, centred on a combined HBO Max/Discovery+ service.

Warner Bros., which owns several well-known media brands including CNN, TNT, Cartoon Network, and Warner Bros. Studio, remains one of the largest traditional media conglomerates and owns a deep content library, strong TV and film studios, and a growing streaming service in HBO Max. 

It controls such blockbuster franchises as DC Comics (Superman, Wonder Woman), Adult Swim/Cartoon Network (Rick and Morty), HBO (Game of Thrones), and WB Pictures (Harry Potter, Matrix).

“Warner Bros. Studio is one of the five major film studios and finished as the second-highest in total box office grosses every year from 2016-19,” says Macker, who puts the stock’s fair value at US$30.

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 has become a more streaming-focused business by acquiring Hulu and launching Disney+ and ESPN+. Disney boasts over 235 million subscribers as of September 2022, across its streaming platforms.

The House of Mouse hogged this year’s Oscar nominations with a total of 22 nominations, leading all studios.

“Disney is successfully transforming its business to deal with the ongoing evolution of the media industry,” says a Morningstar equity report. “The firm’s direct-to-consumer efforts, Disney+, Hotstar, Hulu, and ESPN+ are taking over as the drivers of long-term growth as the firm transitions to a streaming future.”

The new content from Disney and Fox's television and film studios, as well as their rich repository of franchises, will be beneficial for streaming. “We expect that Disney+ will continue to leverage this content to create a large, valuable subscriber base,” says Macker, who puts the stock’s fair value at US$150.

Disney’s collection of animated franchises will increase as more films roll out of the Disney and Pixar animation studios. The company has also linked the Marvel universe through a series of connected films and merchandise. Through acquiring Lucasfilm, Disney has implemented a similar strategy for the Star Wars franchise.

The firm’s sustainable competitive advantage, built on media networks segment, Disney-branded businesses and the entertainment assets from 21st Century Fox should help the firm continue to generate excess returns on capital, says Macker.