Investing in Media Stocks

Media companies produce and distribute films, television series, music, books, and radio programming. We’re consuming more and more of their offerings -- the proliferation of mobile devices and digital media outlets has greatly increased screen time over the last decade, and the coronavirus pandemic has only accelerated that trend. Americans now spend over 13 hours per day consuming or interacting with some form of media.

Companies with strong footholds in digital video keep growing their consumer engagement while legacy businesses heavily reliant on older media formats are struggling; as a result, the industry has seen a lot of mergers and acquisitions over the past few years. The bulk of the industry’s power is now consolidated in just a handful of companies, like Walt Disney (NYSE:DIS), Discovery (NASDAQ:DISCA), and ViacomCBS (NASDAQ:VIAC).

Meanwhile, some media companies have been acquired by telecom companies in a marriage of popular content and powerful distribution. Two big players in this field are AT&T (NYSE:T), owner of WarnerMedia, and Comcast (NASDAQ:CMCSA), owner of NBCUniversal. Companies that specialize only in media are under increasing pressure to offer direct-to-consumer (DTC) services à la Netflix (NASDAQ:NFLX). Even radio producers have turned to podcasts to capitalize on the shift toward on-demand media consumption.

List of top media companies

Above the noise of new platforms, ideas, and companies, a handful of publicly traded media organizations deserve special consideration. Here are a few of my top picks, which I recommend that you evaluate for yourself.

1. Discovery (NASDAQ:DISCA) is heavily concentrated on one type of content (unscripted) and one distribution method (cable television); its recent acquisition of Scripps gives it significant scale. The company owns strong content and brands, including HGTV, the Food Network, and its namesake channel. Additionally, it may be even stronger in international markets, where it owns an attractive portfolio of sports rights, including those for the Olympics. Also internationally, its direct-to-consumer efforts are well ahead of its DTC operations domestically. Discovery recently consolidated its streaming efforts into one brand, Discovery+, giving it a greater competitive presence in the digital streaming space.
2. Netflix (NASDAQ:NFLX) is the largest direct-to-consumer video service in the world. It only began buying originally produced content in 2013, and has been profiting nicely from its growing offering of original series and films; most other media companies now strive to emulate Netflix by selling directly to consumers. Its massive scale provides the company with a lot of data, which it uses to inform content licensing and production decisions and improve the user experience. While Netflix has been taking on increasing levels of debt to fund its content library expansion, its recurring revenue is growing and its operating margin is improving, which should lead to improved cash flow and the ability soon to self-fund its content purchases.
3. Walt Disney (NYSE:DIS) is one of the biggest media companies in the world, especially after acquiring most of 21st Century Fox. It has a very strong portfolio of intellectual property, including Star Wars, Marvel, Pixar, and its many classic Disney brands. It also has strong television brands with Disney and ESPN, which owns long-term contracts to broadcast premium sporting events including Monday Night Football. Its push into direct-to-consumer streaming has gone well since it acquired operational control of Hulu and launched Disney+. Both brands are bolstered by Walt Disney's acquisition of BAMTech, a streaming technology provider. The company also owns a world-famous theme-park business and licenses its characters to toy and game makers. Those operations typically produce higher operating margins than Disney’s film studio, media networks, and direct-to-consumer businesses. As a result, theme parks and character licensing play a significant role in the company’s overall performance. That’s something to keep in mind when considering Disney as a media stock investment.
4. ViacomCBS (NASDAQ:VIAC) benefits from operating one of the only four broadcast networks in the United States. That market position ensures broad distribution and large audiences. Its cable networks, which include BET, Comedy Central, MTV, Nickelodeon, and Showtime, are well diversified across audience demographics. Although Viacom in the past has faced numerous disputes with cable television providers, the addition of CBS to its broadcast network should improve its negotiating position. Meanwhile, with CBS and Paramount combined, the company should be able to produce enough content to supply its own networks and license additional content to direct-to-consumer services. The company also is selling several non-core assets in order to fund additional acquisitions and increase its scale.

What makes a good media company investment?

There are several attributes that qualify a media company as a good investment:

• Differentiated content: Unique intellectual property, long-term contracts with well-known personalities, and licenses to broadcast events like sports and awards ceremonies, which draw big audiences, all attract and retain consumers. Nearly as important is owning strong brands that have value and meaning for viewers.
• Scale: The larger the media company, the more negotiating power it has with distributors and marketers. This can result in broader distribution, higher rates for affiliate fees and advertising, and access to additional marketing support. Additionally, large operating scale creates cross-promotional opportunities among the media company’s properties.
• Diversification: The best media companies are diversified across formats, distribution methods, audience demographics, and geographies.
• Technology: As direct-to-consumer services increasingly provide the bulk of today's media, owning the technology to support DTC distribution at scale can significantly boost profit margins.
• Strong balance sheet: Media companies need robust cash reserves in order to bid on content and produce new films, television series, and other programming. Ample cash on hand also enables acquiring and merging with other companies. But investors need to check that a media company's debt isn’t excessive, while remembering that cash flow that is consistent -- perhaps because it's from subscription revenue, for example -- typically allows for greater leverage.