What happened
Shares of streaming companies Netflix (NFLX -6.41%), Roku (ROKU -1.12%), and FuboTV (FUBO 0.18%) were surging today, rising 4.4%, 4.5%, and 7.3%, respectively, as of 3:54 p.m. ET.
All three stocks are leveraged to streaming subscriptions and digital advertising, which benefit from rising consumer-discretionary spending. Moreover, Netflix trades at a relatively high multiple of earnings, while both Roku and FuboTV aren't profitable. Thus, these stocks have been some of the worst hit in the market, as their relatively expensive stock prices last year were pulled down by rising interest rates in addition to rising interest rates negatively affecting consumers' willingness to spend.
However, two events today may have combined to propel these shares higher. First, a lower-than-expected Producer Price Index (PPI) reading this morning encouraged investors to think inflation may finally be on the decline. Second, an analyst started coverage on two other streaming-oriented stocks with "buy" ratings, which perhaps lifted up the other players in the sector.
So what
This morning, the Bureau of Labor Statistics released the March inflation data for producer prices, or input wholesale prices that go into both goods and services businesses. That reading showed a 0.5% decline in producer prices last month, compared with expectations for flat prices -- the biggest month-over-month decline in three years. Stripping out more volatile food and energy prices, the "core" PPI still fell by 0.1%, also below expectations. On a year-over-year basis, wholesale prices are up just 2.7%, down from 4.9% last month, while "core" wholesale prices are up 3.6%, down from 4.5% last month.
Easing inflation readings are music to the market's ears, especially for growth stocks that have the bulk of their earnings well out into the future. That's because the intrinsic value of a company is the present value of all future cash flows, discounted back to the present. So, the higher the expected long-term inflation rate is, the higher the discount rate; the lower the value of those earnings, the further out in the future they are.
Given that Netflix trades at 35 times earnings, and that Roku and FuboTV are growing but aren't yet profitable, they have been especially sensitive to higher rates.
In addition, the fear in the market has been that if inflation doesn't come under control, the Federal Reserve would have to hike interest rates even further, negatively affecting spending even more and perhaps causing a severe recession. But the sooner inflation comes down, the less high the Fed will have to go, and the prospects for a relatively "soft landing" go up.
So, today's lower-than-expected inflation figures were quite good all around for both growth stocks and consumer-discretionary stocks, and these three stocks represent a combination of both.
A second tailwind for streaming stocks today was an initiation report by B. Riley analyst Daniel Day on digital ad tech platforms Magnite (MGNI 0.33%) and PubMatic (PUBM 1.58%). While Day's "buy" ratings on both companies were due to company-specific strengths, the positive outlook also shows Wall Street may be looking through the near-term advertising slowdown and refocusing on the longer-term shift from traditional linear media to digital streaming platforms, which Day says is in its "early days." That benefits all three of these streaming-first platforms.
Now what
All three of these companies have seen their growth stall out remarkably over the past year, as rising inflation and interest rates have caused consumers to moderate their streaming spending in a big way and for advertisers to pull back spending across the board.
In addition, FuboTV remains especially vulnerable to higher interest rates, as it is burning cash at an unsustainable clip right now, with $316.7 million in operating cash burn last year and with only $337 million in cash left on its balance sheet. That could mean the company may need to raise more cash in the near future, which is an expensive proposition as interest rates have risen. Thus, it's no surprise to see the stock, which has been beaten down even more than the others, rise by an even greater amount today, perhaps due to short-covering.
Still, I would stay away from any company that may need to raise cash in the near or medium term. While inflation is moderating right now, inflation and interest rates could also settle at a higher place than before and during the pandemic. That would still likely make any financing for FuboTV highly dilutive.
So, it's much better to bet on Netflix's industry-leading positioning in streaming, or even Roku. While Roku has reported very disappointing growth metrics of late and is losing money on a generally accepted accounting principles (GAAP) basis, it's not burning cash, and Roku also has a hefty $2.7 billion in cash on its balance sheet with almost no debt.
For investors looking to get aggressive on a rebound of streaming ad dollars, Roku would be the better play over FuboTV, even though Roku is not without risks, most notably around competition. Meanwhile, Netflix is still over 50% off its all-time highs and is the safer play in the space.
