Netflix (NFLX 4.17%) was once considered the bellwether of the streaming video market. However, its dismal first-quarter earnings report on April 19 strongly indicated its high-growth days were over.
Its number of paid subscribers dropped by 200,000 sequentially to 221.64 million, which marked its first loss of subscribers in over a decade. It expects to lose another 2 million subscribers in the second quarter.
Image source: Getty Images.
Netflix blamed its slowdown on tougher competition, Russia's invasion of Ukraine, and shared passwords. It also said it would develop a cheaper ad-supported tier to attract more subscribers. Those comments rattled investors, and its stock plunged to its lowest levels in more than four years.
Some investors might be tempted to buy Netflix after that steep decline, but I think it could still be cut in half if it's revalued as a traditional media stock. So instead of rolling the dice on Netflix, investors should consider buying these two other stocks to profit from the secular growth of the streaming market.
1. Warner Bros. Discovery
AT&T completed its spin-off of Warner Bros. Discovery (WBD -0.35%) -- which merged its WarnerMedia unit with Discovery -- on April 8. This new media company will bring together HBO Max and Discovery+, which together serve nearly 100 million paid subscribers.
CEO David Zaslav believes that combined ecosystem could eventually reach up to 400 million streaming subscribers over the long term. It also plans to expand both its ad-supported and ad-free versions to gain more viewers. As Netflix lost subscribers, HBO and HBO Max actually gained 3 million new subscribers sequentially in the first quarter of 2022.
2022 will be a messy year for Warner Bros. Discovery (WBD) as it faces noisy comparisons to its pre-spinoff numbers. But in 2023, management expects WBD's revenue to grow about 4% to $52 billion -- with $15 billion coming from its direct-to-consumer (DTC) services -- and for its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to increase 35% to $14 billion. It expects to generate roughly $3 billion in annual cost savings from the merger, and to pump out an annual free cash flow (FCF) of $8 billion in 2023.
WBD could be a stronger streaming play than Netflix for three reasons. First, it owns a massive library of existing IPs and doesn't need to license expensive content from other media companies. Second, it's a more broadly diversified media company that also generates revenue from theatrical movies, TV shows, and its own licensing fees.
Lastly, WBD trades at just three times its adjusted EBITDA target for 2023. Netflix still trades at 11 times its adjusted EBITDA estimate for 2023. Therefore, WBD could have plenty of room to run as its streaming ecosystem expands -- but Netflix still doesn't have much of a safety net.
2. Magnite
Magnite (MGNI 1.73%), which emerged from the merger of The Rubicon Project and Telaria in 2020, is the world's largest independent sell-side platform (SSP) for digital ads. SSPs help digital media owners manage and sell their own ad inventories.
After its initial merger, Magnite expanded its connected TV (CTV) segment by buying the video tech companies SpotX and SpringServe. It also acquired Carbon, a platform that enables publishers to measure, manage, and monetize their audiences in real time, this February.
Magnite's stock lost three-quarters of its value over the past 12 months for three main reasons. First, Apple's privacy update on iOS, which enabled users to opt out of targeted ads, curbed the market's appetite for most ad tech stocks. However, that reaction was largely unjustified because Magnite generates most of its growth from the CTV market. Its mobile and desktop businesses also weren't meaningfully affected by the iOS changes.
Second, supply chain disruptions throttled the CTV segment's ad sales to automakers and other affected markets in the second half of 2021. Lastly, rising interest rates sparked a broad retreat from higher-growth tech stocks.
Nevertheless, Magnite still expects its revenue (excluding traffic acquisition costs) to grow by 25% annually for at least the next five years, with an adjusted EBITDA margin of 35%-40%. It expects that growth to be driven by the long-term expansion of the CTV advertising market, which should flourish as linear TV platforms like cable and satellite TV gradually fade away.
Netflix's planned rollout of ad-supported tiers also strongly indicates that Magnite and other CTV-oriented ad tech companies like The Trade Desk are on the right track. Analysts expect Magnite's revenue and adjusted EBITDA to increase 27% and 17%, respectively, this year.
Based on those expectations, Magnite trades at just eight times this year's adjusted EBITDA. When the market finally realizes it's tossed out this growing baby with the bathwater, its stock could easily double.
