one of their trademark launch-events, Apple Inc. [AAPL] unveiled plans last
week to start a new music streaming service pitting them against Spotify and
Pandora, perhaps opening profitable new doors for their iTunes business. Apple
plans to market the service to ~500 million customers in over 100 countries at
a cost of $9.99 per month. Run some quick numbers and you’ll realize this could
become a cash cow for the $735 billion company.
Apple’s announcement is another example of how the entertainment industry
(music and movies) is rapidly evolving from traditional ownership (buying CD’s,
DVD’s, paying monthly cable bills) to internet-based accessibility. It seems
likely that in 2015, revenue from downloading and streaming video will outpace
DVD sales — and then could overtake movie theater revenues within two or three
years. It’s incredible growth.
So, in a few years’ time, all or most of the entertainment content we consume
will be cloud and internet-based. It’s cheaper, easier, and you don’t have to
block off six hours in a day for your cable guy to maybe show-up.
Here are six companies positioning themselves to be players—if not leaders—in
the ever-changing world of content.
1. Netflix, Inc. [NFLX] – Netflix has amassed over 60 million subscribers
worldwide, but CEO Reed Hastings thinks he can get 90 million subscribers in
the U.S. alone. Global numbers would be massive. The stock is pricey though,
having risen over 400% in the last five years and trades at around 170 times
earnings. That’s a lot to pay, but there’s some interesting news in the
offing—the board is seeking approval to increase its number of shares by 30
times, bringing the trading price down to about $20 per share from where it is
now in the $600’s per share. This doesn’t make the company any cheaper, but it
can help attract more retail investors, driving the price even higher.
2. Alibaba Group [BABA] – This Chinese juggernaut is fixated on Hollywood,
and is aiming to compete. They are planning on building China’s version of
Netflix and HBO in a new service called Tmall Box Office. The potential
revenues dwarf what Netflix could expect from a U.S. customer base since
Alibaba can market to 600 million eager customers. The value of the Chinese
online video market is estimated to nearly triple to 90 billion yuan by 2018,
and Alibaba wants all of it.
Inc. [AAPL] –
There are few reasons not to own Apple. It trades at a very reasonable multiple
of around 15 times earnings and the company relentlessly innovates. The
announcement of the streaming service coupled with a news service, that could
be coming soon, shows that Apple is interested in content just as much as
hardware—and content is king in today’s world. The iWatch may not propel the
company to new heights, but I have little doubt that Apple will, in due time,
come out with multiple products that will.
4. Amazon.com, Inc. [AMZN] – ‘Amazon Prime’ has extended its array of
benefits beyond just free shipping, and now has a deal with HBO that allows
Prime members to stream HBO content as part of their membership. Prime has
around 20 million subscribers, is growing at a steady clip, and gives Amazon a
solid base for which to market their other products like e-Readers, tablets,
and streaming boxes.
5. Comcast Corporation [CMCSA] – Comcast fits in as a blue chip player in
the field, a media behemoth that would be hard to knock off in any line of
business. The interesting aspect to focus on with Comcast is broadband, not
necessarily their cable, phone or media operations (they own Universal, which
distributed Jurassic World’s record-breaking $520 million opening weekend).
Comcast is keenly aware of the evolution to streaming, and since 83% of
Americans get their internet connection through their cable company, the market
is huge. When you think about it, their proposed merger with Time Warner Cable
wasn’t about cable at all—it was about high-speed Internet. A combined company
would have controlled 60% of all broadband connections in the country.
6. Walt Disney Co. [DIS] – Don’t forget Walt! This iconic company has
touched the hearts of many and driven nice returns over the long-term. I could
see both of those qualities continuing well into the future. Disney has nicely
outpaced the S&P 500 over the last year, and with the Star Wars and Marvel
franchises on deck for years of movies and merchandise, the future is bright
for sales. What’s more, Disney has a dividend payout ratio of only around 25%,
so they have plenty of room to notch up their dividend in the future to
accompany their growth.
The Bottom Line for Investors
Like with any stock investing, make sure you thoroughly research a company
before buying shares and avoid having too concentrated a position in any one
company, no matter what your conviction. Investors are often tempted to go
“all-in” on an individual stock they really like, but it can go both ways at a
Entertainment is a formidable and growing industry, and it tends to do well
when consumers are doing well. But the opposite can be true too, so it’s
important to pay heed to economic cycles on a macro level when thinking about
we all know, employment and labor compensation plays a huge part with relation
to consumer spending. With Summer here, we can typically expect an increase in
spending on leisurely items such as media and entertainment, as well as travel
and hospitality. But what will this Summer look like on the macroeconomic
front? Disappointing weather in Q1 kept consumers away from stores. What is the
outlook for Q3 and the remainder of the year? What is the outlook on
unemployment? Will U.S. optimism increase?
Disclosure: Past performance is no guarantee of future
results. Inherent in any investment is the potential for loss.
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This communication is for
informational purposes only and nothing herein should be construed as a
solicitation, recommendation or an offer to buy or sell any securities or
product, and does not constitute legal or tax advice. The information contained
herein has been obtained from sources believed to be reliable but we do not
guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged
in rendering legal, tax, accounting or other professional services. Publication
and distribution of this article is not intended to create, and the information
contained herein does not constitute, an attorney-client relationship. Do not
act or rely upon the information and advice given in this publication without
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MUSIC: Watch Lorde & Disclosure Perform at the BRIT Awards
Lorde and Disclosure paired up for a performance at the BRIT Awards on Wednesday, presenting an enticingly upbeat new version of the New Zealander’s breakout hit “Royals” before segueing into the U.K. electronic duo’s single “White Noise.” Stream after the jump: