Entertainment is an integral part of our lives, and the industry has rapidly evolved over the past few years as consumers slowly migrate from traditional cable to streaming. As a result, almost every major media conglomerate has attempted to build a streaming service -- efforts that have had varying success.
Streaming offered the promise of something that many media giants were lacking: growth. But now that interest rates have skyrocketed and debt has become more expensive, management teams may start asking if it is worth it. Here's a look at three major entertainment stocks and whether or not they are destined to become stars or flame out in the coming years.
1. Netflix
Netflix (NFLX -1.13%), the pioneer of streaming, began offering the option in 2007. It has been a long road to profitability for the company, but it achieved its first full year of positive free cash flow in 2022. And after years of growth and burning cash, management expects the business to produce a positive annual free cash flow indefinitely.
Netflix's new focus on generating free cash flow appears to have resonated with investors, as the stock is up roughly 70% off its 52-week low of $162 per share. Still, the stock is still down about 50% from its all-time high of $691 per share in November 2021.
After achieving its first positive free cash flow year in 2022 with $1.6 billion, Netflix recently took in roughly $2.2 billion in free cash flow in the first quarter of 2023. So as its competitors are bleeding cash, Netflix is doing the opposite.
To continue its subscriber growth and profitability, Netflix is cracking down on password sharing, which may alienate some subscribers. Management has rolled out its crackdown in Latin America, Canada, and markets elsewhere. In Canada, the company said it caused an "initial cancel reaction," followed by a positive member and revenue position relative to before the crackdown.
Watch if and when Netflix starts to prevent password sharing in the United States over the coming months. If the company sees a backlash, it may only be temporary based on previous testing.
2. Walt Disney
Although Walt Disney (DIS 0.02%) ventured into streaming with a 33% stake Hulu starting in 2009, it wasn't until 2019 that the media giant launched its stand-alone platform Disney+ in late 2019. Since then, the kid-friendly platform has skyrocketed to 161.8 million subscribers but is showing signs of slowing growth for the first time. Specifically, Disney+ lost a net of 2.4 million subscribers from Oct. 1, to Dec. 31.
Disney also owns ESPN+, with 24.9 million subscribers, and now has a 67% stake in Hulu, with 48 million subscribers. Altogether, these services generated an impressive $5.3 billion in revenue for its most recently reported quarter -- up from $4.7 billion year over year, or an increase of 13%. However, the streaming segment also produced an operating loss of $1.1 billion due to "higher production and increased technology costs."
While streaming only makes up a third of Disney's revenue, it's dragging down the company's profitability. One thing the company could do to address that is raise its subscription prices. For its fiscal 2023 first quarter, which ended Dec. 31, 2022, Disney+ average monthly revenue per subscriber was $5.95 domestically, a paltry sum compared to streaming leader Netflix, which recently averaged $16.18 per subscriber.
Disney's fiscal second-quarter earnings report, due out on Wednesday, will reveal if it has returned to growing subscriber numbers for its flagship platform Disney+, and could reveal if a price increase is in the cards. If one or both occur, it could be a positive sign for the stock, which is down roughly 11% over the past year.
Image source: Getty Images.
3. Warner Bros. Discovery
It's been a little over a year since Warner Bros. Discovery (WBD -1.63%) became a stand-alone company, born out of the merger of Warner Media and Discovery Communications. Since its first trading day, the stock price has been cut in nearly half, and at the time of this writing, it trades for around $13 per share.
As for why the stock has struggled, investors may be growing impatient with the company's lack of profitability as it attempts to trim down its net debt of $46.8 billion. Management believes it can get its net leverage ratio (net debt divided by the sum of the last four quarters' adjusted EBITDA) down from 5 to "comfortably below" 4 by the end of 2023.
To achieve that goal, it will have to keep slashing costs while growing its subscriber base. To that effect, management plans to merge its HBO Max and Discovery+ services into a new one, which it has dubbed Max. That service, launching May 23, will feature three tiers ranging from $9.99 to $19.99 per month based on ad preferences and video quality.
To Warner Bros. Discovery's credit, the company recently posted its first quarter of positive adjusted EBITDA in the streaming segment with $50 million -- a year-over-year improvement of $277 million. The media company has a long way to go to improve its financial health, but it appears to be headed slowly in the right direction.
Are these entertainment stocks buys?
All three of these entertainment companies have tied their futures to streaming. The direct-to-consumer format offers opportunities for revenue growth, but their operating costs and the demands to continuously produce fresh content for subscribers weigh down their profits. In addition, the writer's strike will likely lead to higher costs as wages improve, and could delay future content if it is not resolved in a timely matter.
If investors want to capitalize on the long-term streaming trend, Netflix appears to be in the best position out of these three media giants. It is also the only pure-streaming play of the three, as Disney and Warner Bros. Discovery are entrenched in the declining business of cable television, among other media and entertainment segments. Though it focuses solely on streaming, Netflix has achieved consistent positive free cash flow, making it an appealing stock for long-term investors.
