Putting money into the stock market can seem complicated at first, but a good strategy is to follow broad secular shifts happening across the economy. One of the most powerful consumer shifts in the past decade has been the rise of streaming entertainment. There are several companies all aiming to position themselves for lasting success in this fast-growing industry.
Investors can relax, though, because they don't necessarily have to pick a single winner in streaming services. Here's why that's the case.
Investors have lots of choices
When thinking about streaming stocks, Netflix (NFLX -0.63%) is probably the first one that comes to mind. And there's good reason for this as the company essentially spearheaded the industry with the launch of its streaming service in the U.S. in 2007. At the time, this was a bold move, and it has paid off.
Netflix currently has 238 million subscribers in more than 190 different countries. And it generated $32 billion of revenue in the past 12 months. This massive scale was made possible thanks to the company's first-mover advantage, which has also showed up further down the income statement.
After burning through cash and losing money for most of its streaming history, Netflix expects to generate at least $5 billion of free cash flow (FCF) this year, up from $1.6 billion in 2022. This adds to the bullish case for the stock as its competitors are far from achieving this type of financial performance.
Take Walt Disney (DIS -0.04%). It's remarkable the company has amassed 146 million subscribers for its Disney+ service given it only launched at the end of 2019. This reach makes it one of Netflix's top rivals. Disney's advantage is its incredible library of intellectual property from Lucasfilm, Pixar, and Marvel, for example, that it continues to monetize with new content offerings.
However, Disney's issue is that its direct-to-consumer segment, where streaming services are housed, posted an operating loss of $2.2 billion through the first three quarters of fiscal 2023. CEO Bob Iger still believes Disney+ will hit profitability by the end of fiscal 2024, but it's easy to be skeptical of this outlook. The company will need to cut costs by producing less content while at the same time trying to raise prices, a difficult balance to strike. Investors might still be drawn to the stock because of Walt Disney's profitable parks and linear networks businesses that can support ongoing streaming losses for the time being.
Besides the individual content companies like Netflix and Disney, investors can't forget about a platform business like Roku (ROKU -10.29%) that connects viewers with their favorite shows and movies all in a single user interface. Moreover, Roku allows advertisers to target audiences in a streaming environment, something that will only become more important as more households cut the cord.
Because Roku aggregates all the various services on its platform, it stands to benefit as streaming continues to become an even more popular choice among consumers. Even during an uncertain economic period, active Roku accounts increased 16% in the second quarter with hours streamed up 21% year over year. This shows that consumers are clearly still interested in what Roku has to offer.
The business isn't profitable yet, but management expects to achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) next year. Roku has no debt on its balance sheet, which is encouraging for investors seeking financially sound companies.
This is a smart strategy
Though you can still choose to hitch your wagon to one streaming stock, investors can also bet on the rise of this industry by buying a small stake in a number of different players like the ones above. This strategy offers broad exposure to streaming without depending on the success of a single company. For those who value diversification, this is the best approach.
