The entertainment industry can be particularly cyclical and volatile, but it also provides enormous room for profitability when investing in the right names in the business. World Wrestling Entertainment (WWE), Netflix (NFLX -0.62%), and Lions Gate Entertainment (LGF-A -0.78%) are three remarkably exciting companies in the entertainment industry offering extraordinary upside potential.
World Wrestling Entertainment: Down but not out
Shares of World Wrestling Entertainment were painfully slammed down on May 16; the stock fell by more than 43% after the company announced a new licensing deal with NBCUniversal that was below expectations.
WWE signed a new licensing agreement for its two main programs, Raw on USA Network and SmackDown on SyFy. The company estimates that it will be raising the annual value of its worldwide television agreements by a big $92 million to $200 million. However, many investors were expecting much more from WWE because of the big increases in licensing deals that other sports franchises have obtained recently.
In addition to this, WWE has recently made an aggressive move by launching its online subscription video service called WWE Network. To compensate for the loss in pay-per-view and subscription video-on-demand because of cannibalization, management estimates that WWE Network would require between 1.3 million and 1.4 million subscribers. This is a considerable increase versus the 667,287 subscribers the company reported in April.
Source: WWE.
The good news is that WWE benefits from a remarkably loyal fan base, and the company has a lot of room for expansion, as international markets are still practically untapped. Besides, the economics of the online subscription model are certainly exciting: Once the company gets enough subscribers to cover production costs, each new subscriber flows almost completely to earnings.
Netflix keeps streaming good news
Netflix has delivered truly spectacular gains for investors over the last year and a half, from a price of nearly $100 per share in January of 2013, the stock has more than quadrupled to approximately $440 per share.
But that doesn't mean the bull run is over for Netflix -- far from that. Growth rates are still impressive, revenues during the first quarter of 2014 grew 24.5% to $1.27 billion, and Netflix added 4 million streaming subscribers during the period, bringing the total subscriber base to 48.35 million members. This represents a considerable increase versus 3.05 million new additions in the first quarter of 2014.
Source: Netflix.
Netflix is barely taking its first steps in international markets, where the company has enormous room for expansion. In addition, revenues are outgrowing content costs, so profitability is on the rise over the last several quarters. Strongly growing sales and expanding profit margins should provide a double boost to earnings in the years ahead.
As Netflix continues consolidating its competitive position with high-quality exclusive content, as well as translating growing demand into increasing profits for shareholders, the online streaming leader will certainly be fun to watch in the years ahead.
Lions Gate has an exciting future
Lions Gate Entertainment is down by more than 13% year-to-date, since investors were disappointed by the company's latest earnings report, which brought in lower-than-expected revenues. Earnings per share were above expectations, though, as the company is being more selective when it comes to new projects, and this is producing growing profits as a percentage of revenues.
Source: Lions Gate.
The quarter ended on March 31 was a particularly weak one for Lions Gate; its main launch, Divergent, was released only 10 days before the end of the period. This means the quarter included most of the expenses, but only a small fraction of revenues, related to Divergent.
Moving forward, Lions Gate has a promising pipeline of new launches scheduled for the coming year, so revenues should materially reinvigorate in the medium term. This includes The Hunger Games: Mockingjay Part 1, which will be reaching movie theaters in November, and The Expendables 3, which is scheduled for August, among others.
Lions Gate is also performing well in television; revenues in that segment increased 18% to a record $447.4 million during fiscal 2014, on the back of widely successful series such as Mad Men, Orange Is the New Black, and Nashville. CEO Jon Feltheimer believes revenues in the television division could increase 50% by 2017, while profit margins in that segment could double, from 7% to 14% over that time period.
Foolish takeaway
Small growth companies in the entertainment business usually carry above-average volatility, so investors in these companiesneed to be willing to look beyond the short-term price fluctuations and focus on the long-term opportunities for gains. When it comes to companies such as World Wrestling Entertainment, Netflix, and Lions Gate, the potential returns could more than compensate for the risks.
