Yesterday was a banner day for digital video.
Any regular readers of this weekly column are probably scratching their heads right now. This is the space where I bash a company's fundamentals and valuation to bits, yet here I am with a cheery opening.
Well, innovation usually triggers obsolescence somewhere else. This is what I see happening with digital video finally becoming a viable offering. There are going to be plenty of losers once the convergence is complete. I'm going to single out one of these potential dinosaurs today.
Naturally, it wouldn't be right if I dismiss a company without offering you something better. When I pick on a stock, I come right back with three more that I think will be better portfolio replacements.
Who gets tossed out this week? Come on down, DirecTV
Dishing out the numbers
A quick peek at the rearview mirror shows that DirecTV is on a roll. Through the first nine months of 2009, the company added 820,000 net new domestic subscribers -- and another 438,000 net additions in its faster-growing Latin American market. DirecTV is now in 18.4 million homes in the United States and another 4.3 million in Latin America.
Recessions are built for couch potatoes, but DirecTV is no thrift magnet. The average stateside account is forking over $85.32 a month for service, a figure that continues to inch higher as more households tack on DirecTV premiums including HD, DVR, and NFL Sunday Ticket packages.
DirecTV has also delivered record free cash flow and has been aggressively buying back stock. Perfect!
Bulls will argue that if recession-strapped tube watchers didn't trade down to cheaper U-verse, FiOS, or Dish Network alternatives, DirecTV's growth will likely accelerate when the economy turns around.
I don't buy it. The real threat isn't from more economical digital television, satellite, or cable providers. The real sucking contraption of $85.32 monthly check writers will be when digital video -- live, on-demand, and customizable -- sinks DirecTV's battleship.
That day is closer than DirecTV thinks, even if it has had no problem beefing up its account base until now. Connectivity is leveling the playing field. Cable networks, premium movie channels, and major sport leagues will want to protect their subscriber markups by backing the costlier DirecTV and Comcast
Later this year, Netflix-spinoff Roku expects to launch a service with 100 different streaming channels. There are already 500,000 homes with the company's set-top box, originally marketed as a way to receive Netflix streaming or purchase Amazon.com
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.
Sirius XM Radio
(NASDAQ:SIRI): John Malone has interests in DirecTV and Sirius XM Radio, but they are on opposite ends of the pricing spectrum. The average revenue per Sirius or XM user is clocking in at a mere $10.87 a month. Satellite radio has the same long-term digital-media convergence concerns as satellite television, but in-car connectivity is going to take longer to go mainstream than in-home connectivity.
(NASDAQ:GOOG): As the undisputed champ of online video, no site even comes close to Google's magnetic YouTube. It serves up more than a billion video views daily. Revenue-sharing deals have drawn in media giants, so we're no longer talking about home videos of dogs on skateboards. A growing number of set-top devices, portable media players, and smartphones now stream YouTube. Will ad-supported video be enough for the content creators? We'll see. Google is off to a slow start in charging for premium rentals, but it has time -- and market-share dominance -- on its side.
- Netflix: As the only company that's having breakout success with streaming video as a subscription service, Netflix has gone from potential dinosaur to revolutionary executioner. A whopping 48% of its users spent at least 15 minutes streaming video through Netflix this past quarter, up sharply from the 28% in that camp a year ago. Within 18 months, Netflix targets that two-thirds of its subscribers will be streaming video. This outlook bodes well for the niche that Netflix owns -- and poorly for the future of costly satellite and cable subscriptions.
Sorry, DirecTV. Even Peyton Manning can't save you now.
Longtime Fool contributor Rick Munarriz always takes out the garbage. He owns shares of Netflix and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.