Traditionally, your cable and satellite companies were the ‘go to’ places to get entertainment. But as the cord-cutting phenomena started gaining traction in early 2011, things started to change. According to Fortune, TV subscribership in the U.S (and by extension globally) is declining. There was a 3.4% decline in paid subscription renewals in mid-2018. That compared to 1% in 2016 and 2% in 2017 – 500,000 of those jumping ship in Q4 2017.
Cord-cutting is clearly on the rise. So, what’s left in the U.S. paid TV subscription arena? Only approximately 83 million households!
Streaming is in
Clearly, the writing is on the wall for older entertainment giants like AT&T (T) and Comcast (CMCSA). In fact, anyone holding those names in their portfolios would do well to consider lightening up or exiting altogether. But exit and go where?
The latest (since 2011 actually!) trend is for individuals and households to get their entertainment fixes via streaming services. Millennials especially, who frown upon owning a corded home phone or a “plugged-in” TV set, are gravitating towards streaming services in droves.
Here are two names that look to be a streaming buy for 2019!
Netflix, Inc (NFLX)
The goliath in the streaming industry is undoubtedly NFLX…and it has pricing power to prove it!
The company recently announced a 13% to 18% price hike for its U.S subscribers. When the raise takes effect this year, it will be the steepest price hike since the founding of the company over 12 years ago. Apparently, the hike has been justified on the grounds that the company will be releasing a lot more original and other streaming content to the platform.
But the company also has an impressive track record of performance. Since 2011, when the company had just 23M subscribers worldwide, NFLX now boasts of over 146M – a nearly 535% increase!
According to recent financial results, y/y revenue growth jumped 34% to $4B. International subscriber base grew 40% y/y, with domestic growth coming in the low double digits. Streaming revenue grew 36% to $3.9B. US streaming revenue increased by 25% y/y, with US streaming membership up 11% to 60M. Paid membership stood at 130.1M, with total membership rising to 137.1M – with 7M new members added in Q3 2018. By the time Q4 reporting hits the streets, NFLX expects to have 146M streaming service users during the quarter.
The company invested over $8B in 2018 on programming – which shows that it is committed to delivering growth to its shareholders and subscribers.
One cause for concern though is the cost that the company will pay for its success. The company has taken on over $7.5B in bond debt over the past 3-years or so. With interest rates on an upward trend, albeit at a slower pace, that could add tremendous capital cost expenditure in the years to come.
Additionally, with money-machines Amazon and Walt Disney Co, and AT&T too, planning to commit more resources to their own competing streaming business, that could pose headwinds for Netflix. But that day isn’t anytime soon!
Roku, INC (ROKU)
In the shadows of the recent Consumer Electronic Show (CES) in Las Vegas, Silicon Valley-based Roku Inc presented some startling numbers about its streaming operations. At 27 million accounts (just 18% as many as NFLX), the company experienced explosive year-over-year growth in 2018 – at a mind-blowing rate of 40%. The company also said it’s streaming hours grew by 61% y/y to 24 billion hours. A lot of that growth – almost 7.3 billion hours of it – came in 2018 alone!
Back in the fall of 2017, the company began consolidating large chunks of the free content across its multiple platforms, and aggregating them into its Roku Channel. Estimates are that the consolidation effort contributed around 1% to the company’s Q4-2017 bottom line.
As ROKU adds more content, installs its Roku App on additional 3rd-party TVs, and charges more to advertisers, that contribution will climb to 20% by Q4-2020. And the company is monetizing its ad-opportunities well too. Analysts expect that Average Revenue Per User (ARPU) will grow from $7.45 in 2019 (from $3.68 last year) to $11.28 in 2020. That’s a staggering growth of over 200% in 2-years.
According to the company, 1 in every 4 smart TVs sold in the US in the first 9-months of 2018 bore the company’s brand. And expansions are continually in the pipeline. At the CES, Roku announced Westinghouse Electronics as the newest TV brand to join its Roku TV™ licensing program. In mid-last year, the company launched its Roku Channel in Canada. Samsung, Chinese TV manufacturer TCL, and Funai Electric (Magnavox and Philips brands) also have licensing agreements with Roku. And the company even manufactures streaming sticks for other streaming service providers – like the one built for U.K. satellite operator Sky early last year.
One could look for alternates for streaming investments, but you likely couldn’t do much better than NFLX and ROKU. Sure, you might consider Amazon (AMZN), Alphabet (GOOG) and Facebook (FB) as potentials – but none of those names have momentum or traction yet. Besides, streaming isn’t their core capability.
Further afield, Chinese giants Alibaba Group Holding (BABA), Baidu, INC (BIDU) and Tencent Holdings (TCEHY) might seem appealing. Together, these Big Three tech companies hold over 71% of the Chinese streaming market (16%, 31% and 24% respectively). But given the U.S-China trade wars, and other economic headwinds facing the Asian nation, one should exercise caution with investments there.
However, if you did have to pick a Chinese company to add to your portfolio, BIDU would probably make the most sense. Even rival Netflix, through its streaming licensing deal in 2017, believed that was the horse to bet on.
If you are convinced that streaming is worth adding to your portfolios, then NFLX and ROKU are the ones to hold. Despite the intensive pressure that tech stocks have been under lately, these two have held up well. The short-term return from holding just these two names would be close to 30%.
AMZN and GOOG would be great bets for their longer-term streaming ambitions too. And while BABA and TCEHY might be excellent names to put on your watch list, I’d rate them speculative buys right now. If the Sino-US trade talks don’t end well by March 2019, both those names could fall hard!