The streaming sector has been crushed this year.
A combination of slowing subscriber growth rates coming out of the pandemic, a sluggish ad market, and the Hollywood strikes have weighed on most major streaming stocks.
However, it's a mistake to think that growth is over in streaming. Instead, the industry seems to be going through growing pains as advertisers shift budgets to streamers, pricing reaches an equilibrium point, and the cyclical challenges from the post-pandemic slowdown and the ad downturn pass.
With stock prices down in the sector, now is a great time to go shopping for streaming stocks. Here are three that look like great buys right now.
Image source: Getty Images.
1. Netflix
Netflix (NFLX -0.63%) may not be the bargain it was a year ago, but that doesn't mean the streaming pioneer isn't a good value right now.
Netflix is coming off a blowout earnings report last week, after it added nearly 9 million subscribers in the third quarter and announced a price increase in the U.S., the U.K., and France. That subscriber growth, its best since the pandemic, came with the help of its new paid-sharing program. Netflix is cracking down on the more than 100 million viewers who don't pay for the service, instead borrowing a password from friends or family. The move has given a clear jolt to subscribers, which have increased by 15 million over the past two quarters. The company said it expected to add around 9 million new members in the fourth quarter as well.
Meanwhile, the new advertising tier, though still small, is growing quickly, increasing its subscriber base by 70% sequentially in the third quarter. Importantly, the ad tier also gives Netflix cover to raise prices as members who don't want to pay more can trade down to the ad tier.
After facing a setback from the wave of new competition in streaming and the post-pandemic slowdown, Netflix has revamped its strategy and seems poised for steady growth and profit expansion once again. The company sees its operating margin expanding from 20% this year to 22%-23% in 2024. If it can do that while delivering double-digit revenue growth, the stock should continue to be a winner.
2. Roku
Roku (ROKU -10.29%) has had a vertiginous fall from its pandemic era high as a combination of slowing growth in the ad market and a poorly timed ramp in spending torched profits and sank the stock.
However, the business's fundamentals continue to move in the right direction as the company is seeing solid growth in both usage and users. In its second quarter, active accounts rose 16% to 73.5 million and streaming hours were up 21% to 25.1 million.
Meanwhile, a surge in expenses and the weak advertising market have hammered the stock, but those headwinds won't be around forever. Roku has issued several rounds of layoffs, most recently cutting 10% of its workforce in September to rightsize its spending. In addition, the ad market is showing signs that the trough has already passed as the company's revenue growth improved to 11% in the second quarter.
It could be a year or two before the ad market is back to its normal levels, but its recovery will provide a tailwind for the stock. At its current price, Roku looks too cheap to ignore at a price-to-sales ratio of 2.6. For a company that's a leader in a growing industry, that price looks like a steal.
3. Disney
Disney (DIS -0.04%) is more than a streaming stock, but lately, the "direct-to-consumer" business has taken center stage. The entertainment giant has struggled as it transitions from a linear media company to a streaming one, and its streaming business still isn't profitable.
However, that's expected to change by the end of fiscal 2024, or less than a year from now. Disney just raised prices again on its streaming services, lifting the fee by $3 a month on the ad-free Disney+ tier to $13.99 a month, which should go a long way toward improving the bottom line.
The company's theme park business remains a huge cash cow, and Disney just said it would double down on that business, investing nearly $60 billion in capital expenditures in its parks and experiences over the next decade.
The company's content library and intellectual property are an advantage in and of themselves, and CEO Bob Iger and Co. should eventually get the pricing right to make the streaming business work. While the decline in the linear networks segment will act as a headwind, the business is stronger than the stock price would indicate with shares trading near a nine-year low.
Once the streaming segment turns profitable, investors are likely to respond favorably, and the upside to Disney stock looks substantial if the company can successfully transition to the digital era.
