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3 Stocks to Buy and 1 to Sell for the New Apple TV

By Sam Mattera - Sep 24, 2015 at 10:00AM

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Apple, Netflix, King Digital, and GameStop could all be affected.


The new Apple TV with redesigned remote. Photo: Apple.

The new Apple (AAPL 2.32%) TV will make its sales debut next month. If it succeeds, it could redefine what it means to watch TV, bringing apps to the big screen, and capturing the living rooms of hundreds of millions of households. It could also affect a number of publicly traded firms.

Apple, Netflix, and King Digital could benefit
Apple could obviously benefit from a strong reception, though perhaps more in an ecosystem sense rather than actual earnings. Even if every household in the U.S. bought a $149 Apple TV each and every year, it would only add about $17.6 billion to Apple's annual revenue. Both of those assumptions are grossly optimistic, and even if they were to hold true, it would only boost Apple's annual revenue by about 9%. Apple generated almost $50 billion just last quarter. Apple probably isn't selling the new Apple TV at a loss, but at $149 (or $199 for the 64GB model) it doesn't have the same profit potential as the iPhone.

Yet, the benefits to Apple's broader ecosystem could be significant. Apple TV provides a new avenue for iOS developers, and by integrating with Apple's other products, it could boost iPhone, iPad, and Apple Watch sales, in addition to Apple's cloud services, while keeping households loyal to Apple's products.

Game developers like King Digital (KING.DL) could also benefit. At its event earlier this month, Apple announced that several console-style games would be coming to the Apple TV (including Guitar Hero and Disney Infinity), but also announced modified mobile iOS games, including Crossy Road. King Digital, the maker of Candy Crush Saga and Farm Heroes Saga (among other games) has yet to announce any games for the Apple TV, but its titles would be a natural fit. Its games regularly sit atop the app charts, and have become household names. The Apple TV gives King the opportunity to expand its reach into the living room.

Finally, Netflix (NFLX 1.90%) could be a winner. The streaming service has already achieved significant penetration in the U.S., but nearly two-thirds of U.S. households still do not subscribe. Apple TV could help Netflix grow its subscriber base even further, bringing the concept of Internet-based TV to more consumers. Only about 20% of U.S. broadband households currently own a dedicated streaming media device, according to Park Associates. There are plenty of Netflix-enabled devices available to consumers, but adding another should never be detrimental to Netflix's business.

GameStop could suffer
But not every company will benefit from the Apple TV. Competitors pushing rival boxes (Amazon, Roku, etc) could obviously lose sales, but there is one firm in particular that could have its business models upended.

Video game retailer GameStop (GME 11.54%) has a vested interest in the success of the Xbox and PlayStation. It derives the overwhelming majority of its revenue and profit from these devices, with almost 85% of its sales coming from new and used video games, video game consoles, and video game accessories. In particular, physical game discs -- both new and used -- generate more than 63% of GameStop's gross profit. The Apple TV is capable of playing video games, but not video game discs -- any games released for the Apple TV will be entirely digital, cutting GameStop out of the equation.

The Apple TV lacks the video gaming capabilities of the Xbox and PlayStation, but is capable of playing games, and it will compete with those consoles indirectly. Over time, the device should evolve, becoming more powerful with subsequent revisions, and some buyers could settle for the Apple TV instead of a more powerful console. Should that occur, GameStop's core business could suffer.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$143.78 (2.32%) $3.26
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$191.40 (1.90%) $3.57
GameStop Corp. Stock Quote
GameStop Corp.
GME
$128.46 (11.54%) $13.29
King Digital Entertainment plc Stock Quote
King Digital Entertainment plc
KING.DL

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