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In the ever-changing TV world, it’s a trying time to be an investor.
A lot of change has taken place in the TV industry over the last decade, and a lot is likely to change over the next decade.
TV viewers are already overwhelmed with options of where to watch and what to watch. That also means investors are just as overwhelmed.
One thing is for sure: the rise of Internet TV is opening new doors for some companies, while making it tougher for others.
Last quarter, Americans watched less TV than they did during the same quarter a year ago. Meanwhile, the amount of time spent watching video on the Internet rose. And there are a lot of players looking to get into that space.
Sony (NYSE: SNE) has plans to launch an online TV package. Google (NASDAQ: GOOGL), via YouTube, is launching a music subscription service and I expect video subscriptions won’t be far behind.
World Wrestling Entertainment (NYSE: WWE) launched a WWE Network earlier this year. Effectively, WWE took its content directly to its viewers by cutting out the pay-per-view players and offering its major events online.
In addition, Time Warner Inc. (NYSE: TWX) is launching a stand-alone HBO streaming service next year. There’s been speculation that one of the major content creators, like 21st Century Fox or CBS (NYSE: CBS), might be interested in buying the only remaining premium channel operator, Starz (NASDAQ: STRZA).
What about the rest of the industry?
The content companies, especially those focused on TV, such as Discovery Communications (NASDAQ: DISCA) and AMC Networks (NASDAQ: AMCX), are especially vulnerable to the Internet TV revolution.
What’s the answer? Time Warner Inc.’s CEO has alluded to a mega-merger in media. We are already seeing big mergers in the cable space and there could be more to come.
With all that in mind, what are the best ways to play the rapidly evolving TV industry? Here are three ideas.
TV Industry Stock No. 1: Netflix (NASDAQ: NFLX)
After just laying out the vast competition coming to the Internet TV space, Netflix might get some inquisitive looks. But in the Internet TV space, it’s still the obvious leader. It’s the single largest source of Internet traffic in North America.
That’s still the case even though competition has risen over the years. RedBox, owned by Outerwall (NASDAQ: OUTR), launched in 2002 and has struggled to gain meaningful traction. Hulu was created in 2007 by a consortium of media companies. Amazon.com (NASDAQ: AMZN) launched its video service in 2006. Meanwhile, sales at Netflix have grown over 200% from five years ago.
Carl Icahn believed in Netflix back in 2012 when it traded for less than $60 a share. (Note: My boss, Ian Wyatt, bought shares a year earlier at just over $70. His Million Dollar Portfolio subscribers are thankful for the 370% return.)Icahn has since started selling his shares. But billionaire and famed entrepreneur Mark Cuban is picking up where Icahn is leaving off.
After the selloff in Netflix shares back in October, Cuban said he was buying up Netflix shares. His thesis? Given its vast user base and a market cap that’s just $20 billion, another company will eventually buy Netflix.
Who might buy Netflix is anyone’s guess, but the bigger point is that its 50 million subscribers are very valuable. Facebook (NYSE: FB) paid over $20 billion for WhatsApp – not for the $10 million in revenue it generated, but for its 600 million users.
Going forward, Netflix still has an opportunity for further international expansion. As it becomes an even bigger player in the industry it will have an even greater advantage in content costs.
TV Industry Stock No. 2: Charter Communications (NASDAQ: CHTR)
While there’s some concern that the rise of Internet TV will eat into cable company revenues, the advantage that cable companies have is their vast infrastructure. They are more than just cable companies these days; most also offer Internet services. Individuals that want to watch TV on the Internet still need the Internet.
Charter Communications is easily forgotten behind cable giants Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC). Charter is a turnaround story after filing for bankruptcy in 2009. Since then, the cable company has invested in its network and increased its digital penetration and revenue per customer.
With that, earnings before interest, taxes, depreciation and amortization (EBITDA) has recovered nicely over the last couple years. Charter now generates more than $3 billion in EBITDA annually, compared to less than $500 million when it entered bankruptcy. And if the Comcast-Time Warner merger is approved, Charter will pick up subscribers that those two cable giants are forced to divest.
TV Industry Stock No. 3: Disney (NYSE: DIS)
You may not consider Disney a TV-related company. But Mickey Mouse is an interesting player in this area. It gets a lot of revenues from ABC and ESPN, but Disney’s network has vast scale, generating its revenues from a variety of sources.
It makes movies and is able to leverage that to generate more revenue from live stage plays, music licensing, books and merchandise. It also meshes its movies with its theme parks. Also not known for its dividend, Disney is quietly growing into a dividend paying machine.
I leave you with this: The real winners of TV freedom and greater choice will be the consumers. Yet, on the investing side, not all companies will win. Invest wisely.
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