Shares of Spotify Technology (SPOT -3.08%), DraftKings (DKNG -3.54%), and Paramount Global (PARA 3.86%) were all down big on Wednesday, falling 10.9%, 7.8%, and 8.6%, respectively, on the day.
There wasn't any material news out of any of these companies today. But it looks like each is a victim of the fallout from Netflix (NFLX 0.12%) reporting a shockingly bad earnings report and guidance last night.
One might think that today's reaction is a bit severe, and that Netflix's troubles may be more company-specific. But there could be more similarities to Netflix among these three than you think.
One might think Paramount Global would get a more bullish turn today, given that it is a direct competitor to Netflix and is much cheaper. On the call with analysts last night, Netflix management admitted for the first time that heightened streaming competition is actually playing a role in its tepid growth outlook. In the past, management had previously brushed off competitive concerns.
Paramount is one of those companies edging onto Netflix's turf. Formerly ViacomCBS, Paramount has transitioned from linear to streaming in an impressive way, with three high-growth services in Paramount+, Showtime, and PlutoTV. Streaming subscribers across Paramount+ and Showtime grew a whopping 20% just in the fourth quarter, and the parent company's total subscription revenue was up 84% on the year. Meanwhile, the free ad-supported PlutoTV saw revenue grow 45%.
So why isn't Netfix's loss Paramount's gain? Well, if the largest streamer, Netflix, is having trouble growing and making profits, it will likely be hard for everyone. Paramount's streaming revenue, impressively as it's growing, still only makes up 16% of the company's total revenue. If linear TV is in fact going to shrink, Paramount's streaming services have an even higher hurdle to clear. With high content-investment costs and more competition, all media companies have been put on notice.
Like Netflix, Spotify is also a leading global, subscription-based, consumer-discretionary platform. So when Netflix appeared to hit a wall in terms of its total addressable market, investors might be wondering when Spotify will do the same.
In addition, Spotify will soon have a newly public competitor. On Monday, rival streaming service Deezer said it would go public via a special purpose acquisition company (SPAC), merging with a "blank check" company headed by a former WarnerMedia executive.
Spotify had already given a lackluster forecast for the first quarter, which makes sense as the world emerges from COVID-19. Now, it might have another rival platform to contend with. So Spotify is suffering from addressable-market concerns and new competition. Sound familiar?
Meanwhile, perhaps no emerging industry is as competitive as online gambling, which is why DraftKings may be falling as well. Although the industry just got a favorable data point on Monday in the form of surging sportsbook revenue in Pennsylvania and New Jersey, this is a highly competitive field even for industry leaders such as DraftKings.
Although DraftKings beat revenue last quarter, it guided for a wider loss in earnings before interest, taxes, depreciation, and amortization (EBITDA) than some expected, at $825 million to $925 million for this year. With rising interest rates and inflation pinching the consumer, investors don't have much patience for loss-making growth stocks these days.
It's difficult to know what to do with these three stocks at the moment, as they are each down significantly from all-time highs but don't necessarily look cheap. Spotify isn't profitable, and DraftKings is still projected to lose almost $1 billion in 2022!
Meanwhile, while Paramount definitely looks cheap at a single-digit earnings multiple, it isn't quite as cheap when you factor in its $11 billion or so in net debt, and its cash flow is well below its GAAP earnings due to rising content investment.
Meanwhile, it has to pull off a tricky transition to streaming as its main linear business declines. Of the three, I would pick Paramount due to its reasonable valuation, but as we all know, the streaming-video industry is no picnic.