Streaming media represents a huge market. Statista forecasts that the video streaming industry will reach $95.9 billion this year, and $137.7 billion by 2027.
Given the size of this market, it's no wonder Netflix, one of the earliest players in the space, now must battle a bevy of competitors for market share. Among this competition, two companies, in particular, stand out.
The first is veteran entertainment giant Walt Disney (DIS -0.58%), whose universe of renowned brands, such as Star Wars, gives it an edge. The other is tech titan Alphabet (GOOG -3.33%) (GOOGL -3.37%), which is best known for its Google search engine, but which also owns video platform YouTube.
Several factors make both of these companies great investments for those with a long-term mindset. Here's why Alphabet and Disney are worthwhile stocks to buy among the many competitors vying for dominance in the streaming media space.
The case for Disney
Disney marks its 100th birthday in 2023, but its stock price isn't celebrating. It hit a 52-week low of $78.73 on Oct. 4, and shares remain near that low at the time of this writing. This is due to factors such as Disney's streaming services, under its direct-to-consumer segment, being unprofitable. But this segment is well positioned to help the company succeed over the long run.
Disney is determined to bring its streaming business to profitability by the end of its fiscal 2024, which began Oct. 2. In its fiscal Q3, the direct-to-consumer division's operating income was up by $1 billion compared to Q4 of fiscal 2022.
Moreover, this segment's revenue is growing. Sales reached $5.5 billion in Disney's fiscal third quarter, which ended July 1, a 9% year-over-year increase. This helped lift the company's overall fiscal Q3 revenue by 4% year over year to $22.3 billion.
And unlike a pure streaming service such as Netflix, Disney has the advantage of multiple revenue streams. Its retail stores, theme parks, and other businesses outside of film and television delivered $8.3 billion in fiscal Q3 revenue, a 13% year-over-year increase. These non-film businesses alone generated more income than Netflix's Q3 sales of $7.9 billion.
Disney's portfolio of iconic brands, such as Marvel and Pixar, also adds to its advantages. These brands possess loyal followings, and produce revenue from toys, licensing, and other sources beyond film and TV. CEO Bob Iger stated Disney's businesses that "will drive the greatest growth and value creation over the next five years ... are inextricably linked to our brands and franchises."
Disney is also exhibiting increasing financial strength as illustrated by its rising free cash flow (FCF). The company's fiscal Q3 FCF hit $1.6 billion, an impressive increase from the prior-year period's $187 million.
Why Alphabet is an attractive streaming media stock
People may not think of Alphabet first as a streaming media company, but its YouTube business rivals any other streaming service. YouTube is the world's biggest online video platform. Statista forecasts that the number of people using it will reach 868 million in 2023, nearly four times as many people as the 223 million members Netflix had at the end of the third quarter.
Moreover, that forecast sees YouTube's user base continuing to grow, exceeding 1 billion by 2026. So it's not surprising YouTube is tops in the share of U.S. screen time it holds among streaming services. Netflix is in second place.
YouTube's massive user base resulted in Q3 advertising revenue of $8 billion. And that doesn't include its subscription income.
YouTube is famous for its vast cornucopia of user-generated video content, but Alphabet has been expanding YouTube's subscription business. It now offers premium content, such as NFL games, and its subscriber numbers are growing.
Alphabet doesn't publicly break out YouTube's subscription revenue from Google's other non-advertising income, but in the category where it is reported, revenues increased 21% year over year in Q3, primarily thanks to YouTube's subscriber growth.
YouTube's business is doing well, and when you combine it with Alphabet as a whole, the financial performance is staggering. Alphabet's total Q3 revenue was $76.7 billion, an 11% year-over-year increase. Its FCF in Q3 was $22.6 billion.
Alphabet's balance sheet is strong, with total assets of $365.3 billion compared to total liabilities of $109.1 billion. Its cash, cash equivalents, and marketable securities alone amounted to $113.8 billion.
Alphabet's stock price dropped after the company announced third-quarter results on Oct. 24 because its cloud computing division's revenue growth didn't meet expectations. That share price decline has created a buying opportunity.
With the streaming media industry set for years of growth, and shares of both Disney and Alphabet have experienced price drops of late, now would be a good time to pick up shares of these prosperous businesses.
