Benefits and risks of investing in media stocks
Benefits
- Content production costs are fixed, and distribution is relatively inexpensive, so the potential leverage of a hit show or film can prove extremely profitable for a company.
- Many benefit from strong competitive moats, supported by unique intellectual property and studio assets that protect them from competitive forces and economic downturns.
- Mergers have left only a handful of big media companies, giving them more negotiating power over distributors and the ability to leverage direct-to-consumer services.
Risks
- They can be cyclical, especially those that rely more on advertising than on subscription revenue. Ad sales can plummet in an economic recession, and subscribers might cancel as well.
- Social media and other internet entertainment compete for attention in ways traditional media companies do not.
- Traditional media is highly regulated, and regulatory changes or restrictions could impede revenue and earnings growth.
Methodology: How these stocks were chosen
The above stocks were selected based on each company's competitive positioning within the increasingly consolidated media industry. Scale plays a significant role in selecting a media stock, as larger companies can amortize their content costs over a larger audience.
Intellectual property or exclusive rights to big events like sports play a critical role in today's media landscape as well. Each of the above companies has developed a strong portfolio of IP or unique programming that resonates with a large audience.
All of the above companies exhibit at least some advantage in the industry. Importantly, management is executing strategies that leverage their company's strengths to maximize returns on invested capital.
Should you invest in media stocks?
The media landscape is increasingly concentrated into just a few names. That trend doesn't appear to be slowing down anytime soon. That creates an interesting investment environment as the few remaining behemoths look to buy up smaller competitors. If an existing media giant overpays for a property, it could destroy shareholder value. On the other hand, owners of the company being acquired could benefit greatly if a competitor overpays for their stock. But speculating on a buyout is no reason to buy a stock.
Overall, there are some potential investment opportunities in the media space. Doing your research and buying stocks with wide competitive moats and solid balance sheets trading at or below fair value could result in an excellent long-term investment.
