The Streaming TV Revolution Will Have Winners and Losers. How to Play the Stocks. -- Barrons.com
By Jack Hough
It's fitting that internet television services are called "over the top." That can mean excessive, too, and viewers will soon face a bewildering sprawl of choices.
The phrase was also once used for soldiers scrambling up trenches to attack. Now, Disney, WarnerMedia, NBC, and others are about to enter the battle for streaming subscribers.
If cord-cutting accelerates among traditional cable customers, these companies will need to win streamers quickly. If TV viewers stick with their cable bundles for longer than expected, companies could end up having overspent to go over-the-top.
Even media chiefs disagree over how the next few years will play out.
Bob Iger at Walt Disney (ticker: DIS) tells Barron's that he expects continued erosion for big cable bundles and is intensely focused on Disney+, which starts on Nov. 12. "We're creating a product that serves the consumer the way they want to be served, which is the best thing a company can do," he says.
Bob Bakish, who heads Viacom (VIAB), and will also run CBS (CBS) after a pending merger, says the industry is segmenting on price, but that the traditional cable bundle still holds great appeal. "There are certainly people that have moved over the top and gone back," he says. "What the steady-state penetration will be, time will tell."
Brian Roberts at Comcast (CMCSA), speaking from China, where he is building Universal Studios Beijing to rival Shanghai Disneyland, says that his company, as a broadband provider, is in a good position to reaggregate what is now being taken apart. "Video over the internet is more friend than foe," he says. "We want to get to a place of relative indifference where we can be rooting for the customer."
How can investors pick winners or losers?
Most companies are taking hedged approaches. Some have lucrative other businesses facing less disruption, such as theme parks and wireless phone service. Others have deeply discounted shares to reflect the uncertainty. There is good money to be made in media stocks in coming years, not just despite the turmoil, but because of it.
Accompanying this article is a guide, analyzing the opportunities and risks for the biggest companies in streaming.
Comcast stacks up better than investors might expect, in part because, for it, cord-cutting is a misnomer. In Comcast's markets, its broadband service is the top means of delivering Netflix and Amazon Prime to homes.
Disney has dominated Hollywood like no other company in recent years, making it a heavy favorite for the No. 2 spot in streaming subscribers, behind Netflix (NFLX). But the transition will slow Disney's earnings growth, and its shares trade at a premium to the group. Warner parent AT&T (T), along with CBS and Viacom, are challenged but cheap. Don't write them off.
Netflix has made fools of doubters for years, and no company spends more on content per customer dollar. That's an excellent reason to subscribe, but the company's aggressive cash burn, combined with rising competition, make the path from here risky for shareholders. Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL) -- all can thrive with or without becoming larger TV players. As for Roku (ROKU), its shares are a long- shot bet on a specific outcome -- and they have been soaring.
The main thing to know about pay TV is that subscriptions peaked in 2012, at 101 million across cable, satellite, and telecom, and that they are down to about 90 million. That includes eight million or nine million skinny-bundle customers, who pay for streamlined channel assortments delivered over broadband to save money. The declines are accelerating: Investment bank UBS predicts 6.1 million lost subscribers in 2019, compared with 1.2 million last year.
For cable, the situation is much better than these numbers suggest. Satellite and telecom TV services are falling out of favor, and AT&T, which has both, could account for two-thirds of subscriber losses this year. Growth in skinny bundles has slowed, as providers have raised prices and customers have questioned the savings. And broadband is booming. Cable broadband added nearly three million subscribers last year, including more than a million each for Comcast and Charter Communications (CHTR).
Streaming can refer to different types of services, but keep one distinction in mind. Skinny bundles -- also called virtual multichannel video programming distributors, or vMVPDs -- seek to mimic the cable experience, with groups of live channels. Customers who choose these generally use only one.
Netflix, Disney+, and others are examples of subscription video on demand services, or SVODs, through which viewers watch what they want when they want. Consumers may want many of these services, but surveys suggest that they're willing to pay for only a handful. There are also AVODs, which offer generally less expensive content for free, supported by advertising.
Alexia Quadrani, a media analyst with J.P. Morgan, says that future TV viewers will buy bundles of core streaming services and niche ones, like today's cable bundles, and that there are already too many services. "Most of them won't survive," she predicts. "The economics aren't sustainable." She likes Disney. "You'll see pretty big numbers quickly after launch," she says.
John Maloney, chief executive of New York -- based M&R Capital Management, says that streaming's complexity could result in cable inertia. "The low-hanging fruit of young streamers has been harvested," he says. "There's such a profusion of services that older viewers could freeze and say, 'I'll figure that out later.' "
Maloney likes Discovery (DISCA), which owns the Food Network and HGTV and whose stock trades below eight times earnings.
Michael Lippert, co-manager of the Baron Opportunity fund, says that with streaming, some customers will sign up for the savings, and others for the more flexible viewing experience.
He likes Netflix and Trade Desk (TTD), which allows ad buyers to shop across a mosaic of digital TV s ervices. The company is fast-growing and trades at more than 50 times next year's estimated earnings. The stock price has multiplied more than seven times in three years.
Here are the main TV players, their strengths and vulnerabilities -- and what to do with their shares:
Buy the stock. It is up 34% this year, because investors have come around to the view that broadband gains in coming years will more than offset video losses, making cable companies low-risk tech utilities. But Comcast has lagged behind its cable peers because its television production assets at NBC and Sky add uncertainty. Its shares trade for a reasonable 14 times forward earnings estimates.
In streaming, the company's Peacock service, which will begin next April with shows such as Parks and Recreation, Battlestar Galactica, and a rebooted Punky Brewster, isn't an obvious threat to Netflix or Disney. But Comcast has wisely chosen a "freemium" model for it. That will help with churn, a big risk to streamers, if customers hop from service to service and binge on their favorite shows.
Sky offers English Premier League soccer, news, and scripted content. More important is its position in over-the-top TV distribution in Europe with Now TV.
Comcast's cable business, however, brings in two-thirds of its earnings before interest, taxes, depreciation, and amortization, or Ebitda. Its position there is unmatched, as the largest player with the most sophisticated hardware and software interface, Xfinity X1, which some other cable carriers pay to license. Comcast's recently launched Flex service gives a free streaming device to broadband-only customers, keeping those who step down from cable TV in the software ecosystem.
Matt Strauss, the new head of Peacock, says his vision for the future of television is a screen that is always on. "The TV is the biggest display in the home," he says. "In the past, it's where you watched video, but in the future, it will be for monitoring cameras, controlling the thermostat, and more."
Barclays analyst Kannan Venkateshwar views rebundling as the future of streaming, and broadband providers as best-positioned to do it, because broadband and streaming are highly correlated services, whereas broadband and cable TV had little to do with each other. But in his view, only Comcast has made the technological investment to allow it to add high value as a bundler.
Matthew Harrigan at Benchmark, the biggest Comcast bull on the Street with a $64 price target, says that even assigning zero value to TV would leave the stock worth a price in the low $50s. The shares recently traded at $45 and change.
Other Cable Companies
They have raced ahead: Charter Communications is up 55% this year, and Altice USA (ATUS), 80%. Those two are 15% and 9% more expensive than Comcast, respectively, based on enterprise value against forward estimates of Ebitda. Investors should prefer Comcast, for its greater ability to compete against Apple and Amazon to become a major streaming bundler.
Hold off. This past week, the company missed third-quarter estimates for subscriber wins, but by only a little, which was a good-enough showing ahead of the introduction of well-funded rival services. The bull case on the stock is that Netflix's huge and growing global customer base will allow it to hold the line on content costs and gradually raise prices, resulting in significant free cash flow. Barclay's Venkateshwar, who sees rebundling as the future of TV, views Netflix as likely to become the equivalent of an anchor network.
Investors have lately turned skeptical on cash-burning companies, however, and Netflix, which has gone through more than $5 billion in the past three years, is expected to consume another $7 billion over this year and the following two, before generating positive free-cash flow in 2022. Estimates have been slipping. The stock peaked above $400 last year, but recently traded below $300.
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October 18, 2019 16:49 ET (20:49 GMT)