Entertainment stocks got hit hard in 2022 as an influx of competition and a shift in consumer habits away from at-home entertainment dampened growth in the sector.
However, there's still a lot of opportunity ahead in the streaming industry as audiences and advertisers move over from linear TV. To capture that growth and evolution in the entertainment sector, here are three stocks investors should be watching right now.
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1. Netflix
Netflix (NFLX -0.97%) is still the leader in the industry, but the company is at a transition point in more ways than one. In the company's fourth-quarter earnings report, management announced that founder and co-CEO Reed Hastings is moving on from the co-CEO position, becoming Executive Chair. Greg Peters, the former COO, will join Ted Sarandos as co-CEO.
The change in leadership comes as Netflix just launched its new advertising-supported tier and is beginning to crack down on password sharing, both of which are expected to improve revenue growth, which has slowed as subscriber growth has also decelerated. In the fourth quarter, revenue grew just 2%, or 10% in constant-currency terms, but the company expects that figure to accelerate over 2023 as the impact of advertising and the password-sharing crackdown begin to bear fruit. Additionally, it forecast free cash flow to nearly double to $3 billion, showing that its business model is finally scaling.
In its shareholder letter, the company shared a chart showing that even in the U.S., streaming video makes up less than 40% of television viewing, indicating there is still a large streaming market to penetrate.
Despite its seeming maturity, Netflix still has room for growth, and if it can ramp up profit margins while fending off competition, the stock should be a winner.
2. Roku
Arguably no entertainment stock has more upside potential right now than Roku (ROKU -9.94%). Shares of the leading streaming distribution platform fell more than 80% last year as revenue growth slowed sharply due to headwinds in the ad market, and it reported wide losses after ramping up investments during the streaming boom earlier in the pandemic.
However, there are reasons to believe in Roku's turnaround potential. Active accounts and streaming usage continue to grow. The company said in the beginning of January that it topped 70 million global active accounts, adding more in 2022 than in 2021, and streaming hours rose 19% in 2022 to 87.4 billion, a clear sign that demand for its services is still growing.
And Roku should have a long runway of growth -- Netflix and its many competitors are still in the early stages of exploring streaming with ads, and linear TV still gets the majority of viewing time in the U.S. and around the world.
Roku's financial results should improve once the economy turns around and the digital ad market improves. Unlike subscription-based streaming, Roku directly benefits from viewing time through advertising, giving it an advantage over other streaming stocks in a recovery.
3. Disney
Like other entertainment stocks, Disney (DIS -0.54%) has struggled over the last year as growth in its streaming business has slowed. It finished the year with a $4 billion loss in its direct-to-consumer segment, and its linear TV business continues to decline as well.
Disney also finds itself embroiled in a battle with activist investor Nelson Peltz, who believes the stock is undervalued.
The company brought back CEO Bob Iger in November, an admission that the business was flailing under former CEO Bob Chapek. Iger has been busy making changes to the organizational structure, refocusing the company on "storytelling," driving profitability in streaming, and lowering prices at Disney theme parks after Chapek had raised them.
Despite the stock's struggles, Disney has plenty of competitive advantages, including its massive library of intellectual property like Disney classics, Marvel superheroes, and Star Wars, plus its flywheel business model built on the complementary theme parks, consumer products, and video entertainment businesses. The company also expects its streaming losses to narrow, calling for break-even in the segment by the end of 2024, which should give the stock a tailwind.
Iger delivered superior returns in his first stint as Disney chief and made the company what it is today, acquiring Marvel, Lucasfilm, Pixar, and Fox's entertainment assets. If he can get the company back on track and the streaming business moves toward profitability, Disney has a lot of upside potential in the coming years. If the company can beat estimates in its upcoming earnings report and lift its guidance, the stock could get a significant lift.
