The traditional media industry's launch of streaming services got off to a hot start during the pandemic, but it's turned into an epic disaster. The days of growth and trying to capture the most market share are over, but now, pivoting to profitability is taking far longer than expected. Writer strikes have been resolved, but ongoing discussions with the actors' union in the U.S. (SAG-AFTRA) aren't helping.
Meanwhile, Netflix (NFLX 1.32%) is growing up at just the right time. Shares have rallied 40% so far in 2023, with the company pleasing investors with its positive momentum on the bottom line. With a shakeout coming in the media world, is it too late to buy Netflix?
Time to change the tune on Netflix
I've been avoiding Netflix stock for years. My complaints have ranged from the company's use of debt to buy its own content for its streaming service to fear of the coming wave of traditional media companies launching competing services I thought could muddy the waters for Netflix. And that doesn't even include its lack of positive free cash flow. It's been a wild up-and-down affair for Netflix shareholders, and I'm not sad I stayed on the sideline.
But I am sad that I held on to Disney, one of my oldest holdings, which I used to consider a core stock in my portfolio. Disney has turned into dead money over this same span of time I've steered clear of Netflix, and Disney still has a long way to dig itself out of the hole it's in. Disney+ operates at a loss, ESPN profit margins are in decline, and the return of CEO Bob Iger hasn't prompted a quick turnaround. It appears Disney is getting creative and exploring the sale of non-strategic business units, including selling an equity stake in ESPN.
Almost a year since the return of Iger, I'm still (impatiently) waiting to see some more dramatic overhauls to the business.
Disney is but one example of the mess media and entertainment is in these days. Peers like Paramount Global have also yet to crack the code of running a highly profitable empire in the internet age.
Meanwhile, Netflix has turned an important corner. By all metrics, it is now highly profitable. While this has come at the expense of rapidly cooling revenue (up 8% year over year in the third quarter of 2023), that's OK as the streaming service pioneer figures out new ways to leverage its leading subscriber base into positive cash generation. It even used its positive free cash flow this year to repurchase $3.5 billion worth of stock through the first nine months of 2023.
Data by YCharts.
Still the TV streamer to beat
As of this writing, Netflix stock trades for about 44 times trailing-12-month earnings and free cash flow. It isn't cheap. But given the company's maturity at exactly the time its old incumbents are struggling, Netflix is on my radar now.
Meanwhile, Alphabet, owner of YouTube, is my primary investment in internet media and entertainment. And I'll continue trying to be patient with Disney. Rumors are circulating that it could be nearing some large deals (including selling at least part of its business in India) to get itself focused back on what it does best.
Given the elevated premium on Netflix stock, I'm not inclined to buy just yet. But I do still plan on exiting my longtime interest in Disney (I'd have been surprised if you told me this time last year I'd still be a shareholder now). And when I do, Netflix has my attention as a potential replacement.
