Streaming stocks got shelled last year. After demand for online video entertainment surged during the pandemic and new entrants jumped in, 2022 delivered a rude awakening to the industry.
Streaming stocks plunged as subscriber growth slowed, losses mounted, and industry operators looked to further consolidation.
As you can see from the chart below, all five of the major streaming platforms fell at least 40% last year.
A number of these streaming stocks look cheap after the sell-off last year, but is a turnaround in store? Let's look at what 2023 has to offer the streaming industry.
Image source: Getty Images.
What the macro economy holds
Streaming stocks weren't the only sector to plunge last year. Stocks fell broadly as inflation soared and the Federal Reserve aggressively raised interest rates to bring inflation under control. As rates have risen, fears of a recession in 2023 have gripped the market, and macro headwinds in a number of sectors have already emerged.
Among the sectors feeling the hit is advertising. Revenue growth slowed sharply in digital advertising in the third quarter, and streaming was no exception. Roku (ROKU -10.29%) said revenue growth was just 12% in its third quarter, and the leading streaming distribution platform said it expected revenue to decline in the fourth quarter, a sign that ad demand was weakening heading into the holiday season.
All five of the streaming stocks above have some form of advertising business, so they'll be affected by the slowdown in the ad market to the extent that they're exposed to it.
The impact of a possible recession on streaming consumers is likely to be more mixed. A recession could persuade more Americans to trade down from traditional pay TV to a streaming service or two, which tend to be much cheaper than a traditional cable TV package.
Alternatively, some ad-free subscribers might trade down to ad-supported tiers, which is essentially revenue-neutral for streamers. Lastly, as the industry has become crowded, some consumers may cut back on the number of services they subscribe to.
Streaming companies seem to be preparing for tougher times. A number of them have issued layoffs over the last year, and the launch of ad tiers from Netflix (NFLX -0.63%), Disney (DIS -0.04%), and others gives their customers a way to save money without hurting their business.
Industry challenges remain
Not long ago, there were only three major U.S. streaming services: Netflix, Amazon Prime Video, and Hulu. However, in the last few years, several of them joined the fray, including Disney, Apple, Paramount (PARA -2.22%), Warner Bros. Discovery (WBD -2.17%) through HBOMax, and Comcast's Peacock.
As Netflix co-CEO Reed Hastings has observed, all of these streamers except Netflix are unprofitable, and the streaming industry is going to have to change.
It has become too competitive, and streaming services are spending too much on content, in part because of bidding wars that have raised the price of desirable content. Streaming also seems to be reaching a subscriber ceiling in mature markets like the U.S., so these services can't count on endless subscriber growth. Raising prices every year also isn't tenable when there are so many other options.
In order for profitability to improve in the industry, these companies need to moderate spending, which likely means better control over content costs and in other categories like marketing.
We could also see more consolidation, especially among smaller platforms like AMC Networks, as larger streamers are hungry for quality content, and broadcast media has historically tended toward oligopoly, meaning consolidation is the norm.
Are there any winners?
This is likely to be to another tough year for the streaming industry as profitability seems elusive. But Disney may have the upper hand out of the streaming services today.
The company has a brand name synonymous with family entertainment and an enviable trove of intellectual property that spans Marvel, Star Wars, and Pixar, as well as Disney classics. Lastly, the company can support its streaming investments with highly profitable theme parks and other profit streams.
It's more than just a media company, though it does face the same challenges that other legacy media companies do in cannibalizing its broadcast and cable businesses.
For long-term investors, Roku also offers some appeal at the current price point. The stock is trading at a significant discount after falling by more than 80% last year, and usage on the platform continues to grow even as ad demand has been sluggish.
The company just said it has topped 70 million active accounts, up from 60.1 million at the end of 2021, and streaming hours on Roku rose 19% to 87.4 billion last year.
Headwinds in the ad market could challenge the stock this year, but the user growth bodes well for a recovery.
Meanwhile, legacy media companies, like Warner Bros. Discovery and Paramount, will need to take steps toward profitability to drive a turnaround in their stocks, while Netflix needs to prove its ad tier can move the needle.
As a whole, investors should be cautious with the sector, but if you're looking for exposure to it, Disney and Roku seem to have the greatest potential to outperform right now.
