In today's rapidly evolving economy, the technology and media sectors are converging before our eyes -- creating unique investment opportunities along the way.
Discerning investors are constantly on the lookout for companies poised to lead these transformations. Three Motley Fool contributors, who focus on tech and media investing, have joined forces to explore the advancements in digital advertising, content streaming, and interactive platforms. Let's take a closer look at three exciting investment ideas in widely separate corners of the entertainment sector.
The Sphere launched into orbit last quarter, and insiders are buying big
Billy Duberstein (Sphere Entertainment): Sphere Entertainment (SPHR -1.68%), formerly known as MSG Entertainment, was formed when MSG Entertainment split into two companies, Madison Square Garden Entertainment Corp. and Sphere Entertainment, in April 2023.
Sphere seems to be the more interesting of the two remaining companies, as it includes the new-age concert venue The Sphere in Las Vegas. Additionally, Sphere also holds the MSG cable networks, which are profitable but face growth headwinds due to cord-cutting. Sphere also held the Tao restaurant/club business, but Sphere has since divested that business, leaving just The Sphere and MSG Networks.
The company just reported the first full quarter of operating results for The Sphere Las Vegas, and they were encouraging. Featuring a residency by the band U2 and showings of director Darren Aronofsky's Postcard from Earth, the venue hauled in $167.2 million in revenue and $14.1 million in non-GAAP (adjusted) operating income. While that may not seem like much profit, it seems as though the venue will be able to get more efficient with its showings of both movies, concerts, and dance parties going forward, packing more events into the schedule while also getting more efficient with costs.
In fact, The Sphere only had $67.3 million in "direct" operating expenses, with the majority of costs taken up by selling, general, and administrative costs. Going forward, it's probably a decent bet The Sphere won't need as much marketing investment as it becomes more of a well-known destination. Jam bands Phish and Dead & Co. have already announced residencies this spring, so the venue seems like it's becoming a trendy destination for entertainers and customers alike.
The company also plans to franchise The Sphere to other cities internationally. But the company won't have to undertake the immense costs that were associated with building the owned venue in Vegas. In fact, The Sphere owns the construction company that will build future Spheres, so the company will rake in construction revenue while future Spheres are built, then capital-light franchise fees going forward.
Meanwhile, the company's valuation seems compelling. The consolidated company raked in $51.4 million in total operating income last quarter, annualizing to $205 million. The Sphere's $1.67 billion market cap goes for just about 8 times those adjusted profits.
Management seems to agree, with chairman and CEO James Dolan buying around $2.4 million worth of stock on Feb. 26, then another $3.1 million worth of stock on Feb. 28. Those buys were made around $40 to $41 per share, not much lower than today's $48 share price.
Overall, The Sphere is a new consumer entertainment franchise investors shouldn't ignore.
The Trade Desk charges into the future of effective advertising with tight privacy
Anders Bylund (The Trade Desk): Imagine if Madison Avenue's ad execs had a matchmaking service, but for ads and eyeballs. That's what The Trade Desk (TTD 1.67%) does, connecting advertisers to consumers across many different channels, optimizing the living daylights out of the marketing budget.
Billboards and TV ads are going digital in a big way, and The Trade Desk is there to help ad buyers make the most out of digital ad channels. It's not just about placing ads; it's about making meaningful, long-lasting connections.
That's not as easy as it sounds. The identity of each potential ad viewer is protected by many layers of privacy protections nowadays, and their privacy will only grow more robust when Alphabet removes support for third-party tracking cookies in the ubiquitous Chrome web-browsing engine later this year.
But The Trade Desk stands ready to roll with that incoming punch, equipped with a new system for tracking anonymized user behavior. Unified ID 2.0 (UID2) provides an encrypted, user-consented identifier that enables personalized advertising while respecting user privacy. In this system, the web user's online content consumption patterns are blended into anonymous cohorts of people with similar habits, giving ad buyers the data they need and connecting viewers to ads that should feel relevant to them.
UID2 is an open system, available for any marketing project manager or ad buyer, but The Trade Desk invented it and remains the driving force behind it. By making UID2 accessible to all, it's not just leading by example; it's inviting the entire industry to elevate its game. This approach not only cements The Trade Desk's position as a pioneer, but also challenges the market to adopt higher standards of privacy and personalization.
It's a bold move, indicative of a leader that's confident not just in its innovation but in the positive ripple effects it can create across the digital landscape. Against that audacious backdrop, it's not surprising to see The Trade Desk coming back from the inflation-based digital ad market downturn stronger than before. The company is outpacing the revenue growth of every digital advertising player worth mentioning while generating $543 million of free cash flows in the last four quarters.
Remember, the ad market's downturn is still going on, albeit with brighter days ahead. The Trade Desk has already started its return to business as usual while most of its rivals are lagging behind. I can't wait to see how this innovative marketing expert will perform when the digital cookie jar goes away. The stock is richly valued at 230 times trailing earnings and 21 times sales, but for all the right reasons. You should consider picking up a few shares before the stock runs any higher.
The best yet to come for Netflix stock?
Nicholas Rossolillo (Netflix): For years, I've been content to sit on the sidelines and watch the Netflix (NFLX -0.63%) party from afar. Part of the reason was discomfort with the company's in-house production strategy. Just over a decade ago, Netflix went down the original content creation rabbit hole, and began making its own TV shows and movies, funded with debt (House of Cards was its first foray in 2013). I was unclear how producing content, much of which has limited shelf life, with long-term debt, would pan out.
Also influencing my decision to sit it out with Netflix, Walt Disney was in my portfolio, and I thought I was already sitting on a long-term winner in the media and entertainment industry. Turns out, not so much. I recently exited my longtime market-losing position in the House of Mouse (and house of Marvel, and Star Wars, making things all that more confounding), and re-allocated much of the proceeds to Netflix.
But why buy Netflix now? After all, Netflix now has a market cap of nearly $260 billion (much larger than Disney's), as the TV streaming leader has been on a hot streak in the last year. However, it looks like the hot streak could keep going.
You see, after funding years worth of content using debt and steadily picking up millions of sticky subscribers along the way, Netflix turned an important corner in the last couple of years. The company is now profitable by all metrics -- both on a GAAP net income and free-cash-flow basis. In the past, I was skeptical of the negative free cash flow in particular, as it was reflective of the current outflow of money to fund productions. GAAP net income was positive, though, because video content expenses are amortized over time in this profit metric.
Data by YCharts.
Granted, the recent big jump in free cash flow will moderate in 2024 as Netflix will ramp up productions in the U.S. once again after writer and actor strikes in 2023 hampered its efforts. Nevertheless, the trend is quite clear. Netflix has grown up, and it's looking like a highly profitable media business with a long runway ahead. Building a digital ads business, expanding to more places around the globe, and gradually increasing its reach with more content (self-funded with profit now) are all levers Netflix can pull to keep things moving higher.
None of this is groundbreaking insight. Many investors have known this for years, and it shows in the premium valuation (nearly 50 times trailing-12-month earnings per share, and 35 based on earnings estimates for 2024). But with Netflix now a highly profitable enterprise, I'm finally ready to hop aboard the bandwagon and hold for the long term, as the good times for shareholders could just be getting started.
