HBO parent AT&T (T -1.54%) reported earnings this Monday morning. Streaming video veteran Netflix (NFLX -0.56%) posted its quarterly results last week. Armed with fresh data from both sides, let's see which one of these video specialists makes for the better investment right now.
The case for Netflix
Netflix added fewer subscribers than expected in the second quarter. That's where market makers started a 25% share price drop. However, we're talking about a forgivable slight, arguably repaired by a solid performance in the third-quarter report. Investors remained largely unimpressed, leaving Netflix shares in the bargain bin. The stock should bounce back in a hurry if and when Netflix can prove that the upcoming launches of several new and/or improved streaming video rivals aren't the end of the world.
That should be easy because it's true. A few more streaming video options will hardly kill a company that also competes against every form of other entertainment such as board games, Fortnite, a brisk stroll on the beach, or sharing a bottle of wine with your significant other.
If anything, the addition of new competitors backed by household-grade brand names only proves that Netflix is onto something with the whole video-streaming idea. By flocking to the cause, the erstwhile Netflix killers simply validate the market.
I thought Netflix was a solid buy when it was setting 52-week highs in July at more than $380 per share. The stock is trading 25% lower now, but the company hasn't done much to deserve that sharp discount. In other words, HBO is facing a tough battle here because it'll take a lot to beat Netflix's shareholder value in my eyes.
So Netflix sure looks like a great buy right now.
How about HBO?
HBO has never been a stock in its own right. Started as the premium cable division of Time Warner, Home Box Office also followed the rest of Time Warner in a merger with telecom giant AT&T. That makes HBO one component of a larger media empire, which is tucked under the wing of an even more massive communications conglomerate. To muddy the waters even further, AT&T also owns satellite TV broadcaster DIRECTV.
So there's no way to actually buy HBO shares in any meaningful way, but the premium cable network does contribute to AT&T's financial results in measurable, significant, and publicly reported ways.
In this week's third-quarter report, you could see HBO revenues rising 10.6% year over year while the full WarnerMedia segment saw 4.9% lower revenues and AT&T's total sales fell by 2.4%. HBO is a standout performer in AT&T's otherwise struggling portfolio of diverse operations, hidden inside another mediocre business formerly known as Time Warner.
The HBO portion of AT&T's WarnerMedia division posted $1.82 billion of third-quarter revenues at the aforementioned 11% pace of year-over-year growth. The imminent launch of streaming media platform HBO Max should boost HBO's growth prowess in the long haul but at the cost of reducing AT&T's bottom-line earnings by roughly 5% in 2020. It's not cheap to roll out a brand-new entertainment service.
If you could break out HBO as a stand-alone ticker, it might be a respectable investment. It's hard to tell because there's no market-vetted valuation to speak of, but fast-growing media stocks with a serious online bent tend to fare reasonably well in today's stock market.
As for the whole kit and caboodle we know as AT&T, that's a tougher idea. I would recommend AT&T's stock for income investors looking for powerful dividend yields and not much else. Even then, I could point you to some stronger dividend investments at the drop of a hat.
The upshot: Easy win for Netflix
At the end of the day, I find it easy to recommend buying Netflix stock at today's prices, but it's difficult to do the same for AT&T. HBO might have a shot at winning this trophy as a stand-alone stock, but that's not a real option today.
Come back again if AT&T spins out HBO as a stand-alone business. Until then, I recommend sticking with Netflix.