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Investing in Streaming Service Stocks

Updated: May 2, 2022, 8:43 a.m.

NEWS ALERT: On April 19, 2022 Netflix reported its first subscriber loss in over a decade with expectations to lose even more subscribers in the second quarter of 2022. With over 220 million subscribers, Netflix is by far the biggest subscription video on demand service. However, its subscriber losses indicate its market is approaching saturation. This is a warning to all media companies vying for a piece of the streaming industry.

New streaming TV options are launching at a frenzied pace. With many subscription services available, streaming entertainment has become ubiquitous in U.S. homes as consumers spend large quantities of time and money on streaming media.

The COVID-19 pandemic accelerated the streaming entertainment trend. Stuck at home, millions of people in households around the globe signed up for a streaming service for the first time in 2020. As economies reopen following the pandemic, and consumers spend more time outside of their homes, there are still opportunities to invest in streaming. Many years of growth likely lie ahead for the streaming industry.

Which are the best streaming service stocks to invest in? What makes this relatively new industry so attractive? Keep reading to find out.

State of Streaming

The Motley Fool surveyed 1,500 Americans about their streaming habits and preferences to find out what the future might hold for streaming services.

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Top streaming service stocks

There are many ways to gain portfolio exposure to streaming services. Here we focus on the companies that are either pure plays or earning outsized returns on streaming.

The best streaming entertainment stocks include industry pioneer Netflix (NASDAQ:NFLX), entertainment giant Disney (NYSE:DIS), and the streaming platform leader Roku (NASDAQ:ROKU). Industry newcomers FuboTV (NYSE:FUBO) and CuriosityStream (NASDAQ:CURI) also make this list.

Streaming companies are spread across entertainment, advertising, and legacy media.

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1. Netflix

As the company that got the streaming TV party started, Netflix remains by far the largest streaming pure play, with more than 200 million subscribers. Net new subscribers in the U.S. have slowed in recent years, but Netflix is growing quickly internationally. Also a prolific producer of TV shows and movies, Netflix is constantly adding content in local languages as part of its strategy to continue growth abroad.

Producing entertainment isn’t cheap, though. Consequently, Netflix has generated negative free cash flow for the past few years. However, the company expects to achieve break-even results this year and begin generating positive free cash flow in 2022.

2. The Walt Disney Company

The much-anticipated Disney+ streaming service was launched in late 2019, just in time for the pandemic. It added tens of millions of subscribers worldwide in its first year and quickly became the second-largest subscription streaming service after Netflix. Disney also owns the streaming services Hulu and ESPN+ in the U.S.

Combined with its own extensive catalogue of entertainment and assets acquired from 21st Century Fox, Disney has become a formidable player in the streaming TV space. Despite being a legacy media and entertainment company, streaming services already account for more than a third of Disney’s valuation.

Due to content creation expenses, Disney doesn’t expect to begin turning a profit on Disney+, Hulu, and ESPN+ for years. The company's primary focus is adding subscribers. However, Disney is still profitable overall. The company’s vertically integrated operations -- spanning theme parks, merchandising, broadcast television, and in-house video production technology -- give it plenty of cash to invest in new content without generating excessive losses. During the pandemic, Disney also quickly reorganized to permanently enable more flexible content distribution.

3. Roku

Streaming TV has been a boon for the smart TV and streaming device maker. Roku has become the largest TV platform in the U.S., distributing content via The Roku Channel and acting as a hub for households to manage all of their streaming subscriptions.

Roku distributes its smart TV software and streaming devices at minimal cost, making money instead on advertising and by managing subscriptions. By acquiring content from the now-defunct short-form video service Quibi, Roku is also making a foray into original content creation. In addition, the company acquired Nielsen’s Advanced Video Advertising segment in order to maximize its streaming ad platform’s effectiveness.

Acting as the gateway into internet-based TV for tens of millions of households, Roku is a top way to invest in the growing streaming industry.

4. fuboTV

Streaming service fuboTV, a relative newcomer to the streaming media industry, completed its initial public offering (IPO) in the fall of 2020. This small service has gained popularity as a live TV platform, and it’s a top option for those who want to watch live sporting events.

Building on its strength in sports media, fuboTV acquired Balto Sports in late 2020 to jumpstart its entry into the burgeoning sports betting industry. It subsequently acquired the sportsbook platform Vigtory in March 2021 and launched its own sports betting app in November 2021 that integrates with the streaming service.

More states are passing laws allowing regulated sports wagering following the 2018 U.S. Supreme Court decision to lift restrictions on the industry. As a result, fuboTV is well-positioned to become a top destination for streaming sports viewing and betting in the U.S.

5. CuriosityStream

CuriosityStream, another newcomer to the industry, became a public company in early 2021 via a merger with a special purpose acquisition company (SPAC). This streaming media company focuses on documentaries and science content and was founded by Discovery’s (NASDAQ:DISC.A)(NASDAQ:DISCK) founder and former CEO.

CuriosityStream is competing against some well-entrenched rivals in the non-fiction TV space, including Discovery and Disney’s National Geographic (available on Disney+). The young company is able to keep its content creation costs relatively low since it focuses on educational material and partners with universities. Some of its peers are more focused on reality television in recent years, creating opportunities for this small service to carve out a niche for itself for those interested in the sciences.

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Top streaming advertising stocks

Advertising software firms play a key role in helping streaming video content creators to monetize their work and capture new subscribers. They also help companies to advertise within streaming media.

In this new era of abundantly available at-home entertainment, traditional media companies are faced with new challenges. Chief among them is paying for and profiting from making a TV show or movie. The global theater industry has an uncertain future and may never be as profitable as it was before COVID-19, and millions of households cancel their cable TV subscriptions every year. Consequently, revenue derived from advertising via cable channels isn’t as plentiful as it once was for TV stocks.

Streaming shows and movies are monetized via monthly subscriptions and online ads rather than global box office or cable TV advertising. As companies seek to advertise themselves via streaming media, and content producers look for businesses that want to purchase ad time, The Trade Desk (NASDAQ:TTD)and Magnite (NASDAQ:MGNI) are well-positioned to profit.

1. The Trade Desk

This cloud-based software company is a buy-side platform, meaning that it helps companies that pay for advertising to automate the purchasing and management of marketing campaigns. Streaming television (also known as connected TV or CTV) has been one of the fastest-growing segments for The Trade Desk, and it is likely to remain so for some time as the entertainment industry rapidly migrates to internet-based video and streaming.

2. Magnite

Magnite is a sell-side ad platform, meaning that its cloud software works with content creators themselves and is often a counterparty to The Trade Desk’s buy-side platform. Magnite recently announced that it was acquiring the CTV company SpotX, making Magnite the largest independent sell-side streaming advertising platform. Some two-thirds of Magnite's sales are generated by online video and TV.

Legacy media companies offer streaming exposure, too

Telecommunications companies have begun offering streaming services, such as Comcast’s (NASDAQ:CMCSA) NBCUniversal launching Peacock. Many of the tech giants are offering TV streaming subscription services, too, including Amazon (NASDAQ:AMZN) Prime Video, Apple (NASDAQ:AAPL) TV+, and Alphabet’s (NASDAQ:GOOGL)(NASDAQ:GOOG) YouTube TV.

Legacy companies are also offering new ways to consume live TV over the internet -- as replacements for traditional cable packages and broadcast television. Tubi, a free-to-use service and the largest on-demand streaming service in the world supported by advertising, was acquired in early 2020 by Fox (NASDAQ:FOXA)(NASDAQ:FOX).

ViacomCBS (NASDAQ:VIAC) recently reorganized its streaming segment, which includes Paramount+ (previously known as CBS All Access) and the free ad-supported service Pluto TV. Dish Network (NASDAQ:DISH) is the owner of Sling, a flexible and low-cost cable TV replacement.

Discovery has launched Discovery+ to provide a unified service that streams shows from cable station favorites such as Food Network and HGTV. Discovery+ also includes live sports as part of its package offering in Europe. Its planned merger with WarnerMedia, to create Warner Bros. Discovery, will significantly boost Discovery's production capabilities. The merger also creates opportunities for Discovery to offer a bundle of services, including HBO Max and the forthcoming CNN+ streaming service.

Is investing in streaming services right for you?

Streaming TV industry growth has only been accelerated by the pandemic. But investors should keep in mind that this nascent segment of the entertainment industry is not yet very profitable, with streaming services more focused on accumulating subscribers as fast as possible. Hundreds of millions of global subscribers are up for grabs as potential customers for streaming services.

As a result of the sector’s rapid growth, stock prices of streaming media companies can be volatile. The long-term growth potential of internet-based TV streaming is immense, with streaming services in the next decade likely to recreate the way entertainment is consumed.

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