Streaming stocks and the surrounding industry is learning what those of us on the printed web learned over 20 years ago.
In a world of unlimited content, the limiting factor is time.
The hope was that the cable packages of the past might be resurrected online, consumers paying just as much as they formerly did, but paying it directly to programmers. As that hope faded, streaming supporters took to promoting the idea of “free” streaming. However, the amount of ad inventory available quickly overwhelmed the market’s ability to absorb it.
This spells trouble for all companies involved in streaming. The gold rush is ending. The industry is about to go through consolidation. Investors might profit by buying these streaming stocks at their lows, waiting for the inevitable buyout.
The setup for this, of course, comes in the form of falling stock prices.
First Netflix (NASDAQ:NFLX) fell from grace. Then Walt Disney (NYSE:DIS) did the same. Since then no company has been spared, not even long-term winners like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Amazon (NASDAQ:AMZN), which should dominate the business that remains. (Alphabet’s YouTube isn’t a paid streamer, but it has about 2.5 billion users, 11 times more than any of the paid services.)
In 2023 the leading companies will be able to pick-and-choose from among those now trailing in the market. Getting into these streaming stocks as they bottom could provide profit once deals are announced.
Regulators may resist, but when the alternative is bankruptcy, they always give in.
|WBD||Warner Brothers Discovery||$11.12|
Fubo (NASDAQ:FUBO) sought to tie live sports streaming to gambling, but wound up lacking the rights needed to capitalize.
In September Fubo had 1.231 million customers, streaming a collection of cable channels against rivals like Alphabet’s YouTube TV, Paramount Global’s (NASDAQ:PARA) PlutoTV and Disney’s Hulu Plus. This delivered $219 million in revenue during the quarter, up 40% year-over-year.
Fubo’s problem is that because it’s focused on sports, the cost of rights exceeded the subscription revenue. Add in marketing, administration and technology, and the company lost $161 million for the period.
The biggest problem is local sports. When Sinclair Broadcasting (NASDAQ:SBGI) overpaid for Fox’s regional sports cable networks, after Disney acquired Fox’s other entertainment assets, it renamed the channels Bally Sports and hiked their price dramatically. The only major streamer to carry the service, DirecTV, now charges an extra $20/month for a tier that includes a local service. Bally’s has since begun offering its own streaming package at $20/month. Fubo has been effectively bypassed.
Another appeal of Fubo was the integration of programming with sports betting. But that unit was killed in October after the company found it wasn’t financially viable because of high customer acquisition costs.
Other sports rights have moved off traditional cable, onto streaming. Disney’s ESPN has ESPN Plus for games it can’t fit on its cable channels. Comcast (NASDAQ:CMCSA) moved its English Premier League coverage to its Peacock streaming service. Paramount bought rights to Europe’s Champions League and Italy’s Serie A for its Paramount Plus streamer. Even America’s Major League Soccer has moved to Apple (NASDAQ:AAPL).
With sports rights moving off cable, it’s hard to see how Fubo has a future. But its growth and the commitment of its audience could still be valuable for someone else. Gambling companies like Caesar’s Entertainment (NYSE:CZR) or DraftKings (NASDAQ:DKNG) could add Fubo. If Disney wants to jettison ESPN, as has long been rumored, its new owners could grow their business by adding Fubo’s cable offerings to ESPN Plus.
With Fubo’s market cap now down to $540 million, it might be attractive to an acquirer. Disney would offload an arm whose association with gambling hurts its image, while Fubo would get a new “business daddy” with an assured stream of rights. If an investor is looking for streaming stocks to bet on, so to speak, this type of acquisition could lead to profits in years to come.
AMC Networks (AMCX)
That pretty much describes the company right now.
The company’s explanation was that it hoped losses to cord-cutting might be made up in streaming, but that didn’t happen. The company’s AMC Plus streaming service costs just $7/month and in September had 11 million subscribers. The value of those subscribers, over a year, is over $900 million, but advertising and operating costs must come out of that.
AMC now has a market cap of just $753 million on 2022 revenues of about $3 billion. Revenue for the third quarter was 16% behind 2021, but the company remains profitable, earning $84.7 million in its last quarter.
Management has been aggressively taking an axe to its production budget as cable viewers flee. It recently reversed its decision to buy another season of Moonhaven, a popular sci-fi show. It plans to write down $475 million in assets, including $400 million in programming that’s now worth less than it thought.
While AMC may be too small to survive on its own, its programming assets could still be valuable to a larger company, like Netflix.
A good example of streaming stocks that have crashed, Roku (NASDAQ:ROKU) was worth about $30 billion just a year ago. Now it’s worth less than $7.5 billion. Supporters like Justin Patterson of Keycorp (NYSE:KEY) are downgrading the stock.
Anthony Wood founded Roku soon after he sold his digital video recorder company, ReplayTV, in 2002. Wood controls the voting stock and has 28% of the common.
Roku sells add-in hardware and TVs built for streaming, giving it a point of control over its customers. To this it adds Roku TV, its own free streaming service, on which it sells advertising.
Both businesses are having trouble.
Roku executives warned about a tough holiday when announcing third quarter results early this month. The company added 2.3 million new accounts in the third quarter, but device sales were down 7%. Roku also warned that revenue for the current quarter will fall short of a year ago, at $800 million. A few weeks later it laid off 200 employees. Roku was a growth stock that stopped growing without turning a substantial profit.
But there are two points of control in streaming. One is the direct customer relationship. The other is the streaming technology, where Roku still has a 33% market share. This could make it interesting to a company that has lost control of its old distribution channels, as streaming has replaced broadcasting and cable as the heart of the TV experience. Comcast could be one such buyer. So could the companies that follow.
Paramount Global (PARA)
The history of Paramount Global dates to the beginnings of mass entertainment.
Paramount Pictures was founded in 1912 by theater tycoons Jesse Lasky and Adolph Zukor. They needed movies for their theaters. Its biggest unit is CBS, founded by William Paley to make use of broadcast radio and, later, TV licenses. Its other big division is Viacom, originally CBS Films, which grew as an operator of cable networks like MTV, Comedy Central and Nickelodeon.
Streaming cost Paramount control over its distribution. Management was obsessed over the twilight of Sumner Redstone, who controlled both CBS and Viacom until shortly before his death in 2020.
Paramount is still enormous, with revenue of over $28 billion in 2021. It’s still profitable, with net income of $902 million for the first three quarters of 2022. But investors are no longer impressed. Its market cap was under $12.5 billion on December 6.
Paramount has several streaming services. The biggest paid service, Paramount Plus, has 46 million subscribers. Paramount also owns Showtime, BET+ and a kids’ service called Noggin. Its free service, Pluto TV, has 73 million subscribers. Combined the streaming units had $1.23 billion in revenue during the third quarter. But cord-cutting still yielded a result that disappointed analysts.
Paramount’s broadcast licenses make it hard to sell. So does its size, and the controlling interest still held by the Redstone family. But it has an enormous program library and continues to produce more. The way out may be to sell to a company not now involved in entertainment, like Walmart (NYSE:WMT), which has often signaled it has streaming ambitions.
Or it could buy Roku.
Warner Discovery (WBD)
One of the streaming stocks that has already experienced a merger mania of sorts, Warner Brothers Discovery is the residue of two failed deals, Time Warner’s acquisition of AOL in 2000 and AT&T’s (NYSE:T) acquisition of Time Warner, which closed in 2018.
It was born last January, when cable network operator Discovery Networks bought a majority stake and renamed the whole. Time will tell whether this is the third bad deal for the company.
Early signs are not promising. Since its debut, WBD stock is down by two-thirds. Its third quarter statement showed a loss of $2.3 billion, 95 cents per share, on revenue of $9.8 billion. Not a good start on paying off long-term debt of $51.8 billion.
The only possible result was to cut back. Some 70 people were let go in the sports division. The television workforce was cut by 26%. Streaming marketing was cut. The most visible layoffs were at its CNN news division, already falling behind rivals Fox and MSNBC. CNN Headline News eliminated live programming.
Warner Discovery now has a market cap of $27 billion on that $40 billion of revenue. But its enterprise value, including debt, is closer to $75 billion. That makes it tough for anyone else to swallow. But there is one big company with streaming ambitions for whom that price might be easily digestible.
That company is Apple.
On the date of publication, Dana Blankenhorn held long positions in GOOGL, AAPL and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.