When one door closes in the business world, another one usually opens. That's what we're witnessing from streaming-service providers, with a cumulative 20 million consumers cutting their ties to traditional paid-TV subscriptions since the beginning of 2019.
According to a May-released report from Market Research Future, the global video-streaming market is expected to reach an estimated $972 billion in market value by 2030. For those of you keeping score at home, this works out to an 18.1% compound annual growth rate throughout the remainder of the decade. With consistently stellar growth prospects, it's no wonder streaming-service stocks have been so popular with investors.
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But not every streaming stock is going to end up a winner. As we sprint ahead to the 2022 finish line, two beaten-down streaming stocks stand out as surefire buys in the new year, while another widely held streaming giant is shrouded in red flags and should be avoided at all cost.
Streaming stock No. 1 to buy hand over fist in 2023: Walt Disney
The first streaming stock that's an absolute screaming buy for 2023 is theme-park operator and media behemoth Walt Disney (DIS 0.18%). Even though the company has plenty of revenue streams, it's become a big-enough player in the streaming space that it's more than worthy of inclusion on this list.
Like most media and entertainment companies, Walt Disney was hurt by the COVID-19 pandemic. The shuttering of many of its theme parks, coupled with closed movie theaters, really dented its revenue and bottom line for a two-year stretch. With Walt Disney beginning to put these headwinds into the rearview mirror, it can turn its attention to its fastest-growing operating segment -- streaming.
It took less than three years following the November 2019 launch of Disney+ for the company to sign up 164.2 million subscribers. If ESPN+ and Hulu subscriptions are also factored in, Walt Disney has more aggregate streaming subscribers than industry-leader Netflix (NFLX -3.92%).
For the moment, Disney+ is a money-losing venture. But after nearly three years of ramping up its subscriber count, Disney can begin pulling the cost and price levers that'll be needed to move Disney+ to profitability by some time in fiscal 2024. To achieve this, Walt Disney announced a price increase for Disney+, as well as a recent ad-supported tier that's $3/month cheaper than the ad-free streaming service.
Another factor working in Walt Disney's favor is the return of Bob Iger to the CEO role. During his previous tenure as CEO, Iger oversaw a multitude of transformative and content-enriching acquisitions, including Pixar, Marvel Entertainment, and Lucasfilm, among others.
But the real key to the success of Disney+ is the irreplaceable nostalgia, engagement, characters, and storylines that Walt Disney brings to the table. There are very few companies that have the ability to engage with consumers on an emotional level quite like Walt Disney. People have shown for decades that they're willing to pay a premium for the experience and entertainment that Disney can offer.
With shares of Walt Disney down 39% year to date, it has all the hallmarks of a no-brainer buy for the new year.
Streaming stock No. 2 to buy hand over fist in 2023: Paramount Global
The second streaming stock that can confidently be bought hand over fist in 2023 is Paramount Global (PARA -0.47%), the company formerly known as ViacomCBS.
Paramount is a legacy media company that, like its peers, is in the midst of an operating transformation. Unfortunately, it's dealing with the growing likelihood that a recession could materialize in the U.S. next year.
When the winds of recession begin blowing, it's normal to see advertisers pull back on their spending. That's bad news in the very short term for the company's legacy TV operations, but it's not having any negative impacts on its fast-growing streaming ventures.
Even taking into account that Paramount pulled its streaming services from Russia during the second quarter and shed 3.9 million subscribers in the process, the company's global direct-to-consumer count totaled 67 million by the end of September. That's 20 million more subs than Paramount had during the comparable period one-year ago.
One of the ways Paramount Global is succeeding in courting new subscribers is by remaining nimble with its content. In particular, many of the company's films only have 45-day exclusivity windows in theaters before they become available for streaming on Paramount+.
Let's be clear: It also doesn't hurt that Top Gun: Maverick became one of the five highest-grossing domestic movies in history this year. Winning content in theaters is an easy way to attract subscribers. Top Gun: Maverick is set to hit Paramount+ for streamers on Dec. 22.
Don't overlook the role Pluto TV is playing for Paramount Global, either. This free, ad-supported streaming service is No. 1 in the U.S. and has consistently seen average revenue per user increase as both aggregate subscriber numbers and viewer hours climb. Pluto TV could be a surprisingly strong performer if a recession materializes, since consumers are likely to shift their viewing habits to less-costly (or in this case, free) content.
Currently valued at less than 10 times Wall Street's forecast earnings for this year, Paramount Global is ripe for the picking by opportunistic investors.
Image source: Getty Images.
The streaming stock to avoid like the plague in 2023: Netflix
As I stated before, not all streaming stocks can be winners. Despite a storied history of success and the leading share of the U.S. streaming market, Netflix is the plain-as-day stock to avoid in this industry in 2023.
To state the obvious, Netflix wouldn't be worth $141 billion if it didn't do something right. Sustaining the No. 1 share of streaming in the U.S., as well as signing up approximately 223.1 million subscribers worldwide, certainly counts for something.
Additionally, whereas legacy media companies are losing copious amounts of money building out their streaming services and content libraries, Netflix has been profitable on an adjusted basis for years. Within the streaming space, Netflix is the company that's clearly shown Wall Street it can generate a profit.
However, Netflix has two sizable hurdles it'll struggle to overcome in 2023. The first is the ongoing loss of domestic and global market share. Not only is Netflix contending with increasing competition from the likes of Walt Disney and Paramount, among others, but moving past the pandemic has given consumers less incentive to stay home and watch movies or shows all day.
Slowing or stalling subscriber growth will put more pressure on Netflix to use its pricing power to move the needle. That's not the best growth strategy when U.S. and global consumers are worried about an economic contraction.
The other problem for Netflix is its cash flow. This is a company that spent a small fortune expanding its streaming services into international markets. In doing so, Netflix often had more cash flowing out the door than it was generating from its operations. Although the company finally shifted to positive cash flow within the past couple of years, its cash generation is still pretty poor, relative to its mammoth market cap.
While a couple of the FAANG stocks are historically inexpensive, relative to Wall Street's consensus cash-flow estimate in 2023, Netflix clocks in at a frothy multiple of 45 times Wall Street's projected cash flow for the upcoming year. That's far too rich a valuation, considering Netflix's market-share losses and its considerably slower subscriber growth as competition ramps up. Netflix may be the premier name among streaming-service stocks, but it's an easy one to avoid for investors in 2023.
