The streaming industry is a growing market, worth over $80 billion today and expected to hit nearly $130 billion by 2026. The rise of streaming has coincided with significant declines in cable subscriptions, with streaming overtaking cable in July as the way most Americans watch TV. 35% of U.S. consumers chose streaming services in August 2022 over 34.5% who opted for cable.
An influx of streaming competition has meant dozens of new options for consumers, but also revenue losses for companies like Netflix (NFLX -0.67%), which reigned supreme only a few years ago. As the industry continues to grow, adding a streaming stock to your portfolio isn't a bad idea, but it's essential to know which one. Let's assess.
Stock No. 1 to buy: Disney
Walt Disney (DIS 1.27%) dipped its toes into streaming when it became a stakeholder in Hulu in 2009. It attained a majority stake in March 2019 as a result of its acquisition of 21st Century Fox. However, the company dove headfirst into the market with its flagship streaming service Disney+, which launched in November 2019. The platform has taken significant strides since then, helping Disney surpass Netflix for most streaming subscribers for the first time in its most recent quarterly results.
In the third quarter of 2022, Disney reached 221 million streaming subscriptions across Disney+, Hulu, and ESPN+, which beat Netflix's 220.7 million. In addition to rapid subscriber growth, Disney plans to implement price hikes across all of its platforms in December, which will substantially raise its average revenue per user (ARPU). As of July, the company's ARPU was $6.27 per month in the U.S. and Canada, whereas Netflix's was $15.95.
Disney offered low prices to grow its subscriber base, but should now enjoy a boost in revenue in 2023 as an established Disney+ continues to attract viewers with engaging content. In addition, its coming ad-supported tier in December should fuel revenue growth.
Outside of streaming, Disney celebrated a 70% jump in theme park revenue from the pandemic lows it experienced the year before. Disney parks reached $2.19 billion in operating income in Q3 2022, with CEO Bob Chapek revealing to CNBC in August that despite rises in travel costs such as gas and airline tickets, park attendance had not softened.
Stock No. 2 to buy: Amazon
The streaming market can sometimes be unpredictable, so it helps to choose a streaming stock that also has vested interests elsewhere. Disney is a great example, but Amazon (AMZN 2.77%) is perhaps the most diversified company in the industry. The e-commerce titan has expanded its business to include streaming, cloud services, digital advertising, and more. Recent acquisitions of iRobot and One Medical will also see Amazon move into consumer robotics and healthcare.
As one of the pioneers in video streaming, Amazon launched the first version of what is now Prime Video in 2006. The streaming service achieved a 19% market share in the U.S. in the first quarter of 2022, behind Disney's 24% and Netflix's 23%.
Moreover, while it is possible to subscribe exclusively to Prime Video, most subscribers come from Amazon's lucrative Prime membership, which also includes expedited shipping, ebooks, music, and gaming. In 2022, U.S. Prime subscriptions reached 159.8 million -- 48% of the country's population.
The figures mean at least 48% of the country has access to Prime Video before considering those who pay for it exclusively. The varied aspect of Prime makes it easier for Prime Video to retain subscribers, as it is more of an added perk to the bundle of services rather than the whole subscription.
As the rise of inflation continues to cut consumer spending, Prime members can drop other services while retaining access to streaming. The argument for Prime Video has only grown stronger in 2022. Amazon has added live sports programs such as Thursday Night Football and acquired MGM, which brings along franchises such as James Bond, Rocky, and more.
The stock you'd be wise to avoid: Netflix
Netflix has suffered a tumultuous 2022. Its stock has tumbled 60% since January, when its first subscriber losses in a decade drove away investors. The company is the only streaming platform to consistently lose its share of streaming subscriptions for 10 straight quarters. From Q1 2020 to Q2 2022, Netflix has gone from having a 42% share of all streaming subscriptions to 26%.
Netflix lost 200,000 subscribers in Q1 2022 and then another million; however, that latter number was better than the forecast of 2 million. Moreover, Netflix has made some positive moves, including a venture into gaming as well as a promising, ad-supported tier launching in November. Still, the fact remains that nearly all of the company's revenue depends on streaming subscriptions, which can vary significantly from quarter to quarter based on what service offers the hottest content.
Netflix can potentially increase its revenue significantly with its coming ad-supported tier. In fact, some analysts have estimated the company could generate $8.5 billion in ad revenue by 2025. That figure is promising but not guaranteed; Disney and Amazon are more reliable for consistent growth.
Netflix is currently in the process of growing alternative revenue streams, while Disney and Amazon already have established businesses outside of streaming. Consequently, investors looking to add exposure to the streaming business in their portfolio should favor Amazon and Disney today and avoid Netflix until it proves itself as a more reliable investment.
