The Streaming Wars – What to Expect from the Biggest Stocks in Streaming

The phrase "Streaming wars" refers to the ongoing competition among media companies that provide streaming video content to consumers over the internet. The term became popular in the 2010s, as a growing number of companies, including Netflix, Amazon, and Disney, began to invest in creating original programming, rather than just licensing content from other studios. With the launch of new streaming services, the competition for subscribers and investor sentiment has grown even more intense. Companies are throwing billions of dollars into producing new shows and movies, as well as acquiring the rights to existing content, in hopes to see these investments be reflected in their valuation.  We saw this manifest last week in Warner Brothers Discovery stock which saw over an 8% jump after CFO Gunnar Wiedenfels shared key insights about their upcoming streaming service that will offer a sizable upgrade on the current offering, HBO Max.  

For those in the market, following the streaming wars can offer some unique trading opportunities. In this article we will unpack and assess some of the biggest stocks in streaming: Netflix, Amazon and Disney.  

Netflix (NFLX) 

Netflix began as a DVD-by-mail service in 1997, but quickly evolved to become one of the world's leading streaming platforms. In 2007, the company introduced streaming services, which allowed customers to watch movies and shows online without the need for physical media. This move was a game-changer and marked the beginning of the end for traditional DVD rental services as well as the inception of a completely new multi-billion-dollar industry. Netflix boasts revenue figures that vastly exceed the industry and sector averages as many other players are simply groping for a foothold in the market. Earnings per share is also more than double what the average competitor in this space typically delivers to investors. With an impressive 19% return on invested capital and striking net income growth, analysts seem to be generally optimistic when it comes to going long on the stock.  

Jefferies has improved its rating for Netflix stock to a "Buy" and set a new target price of $385.00, which is an increase from its previous target of $310.00. This would represent a 16.36% gain from the current stock value. However, the stock does not come without scepticism either. Josh Brown, CEO of Ritholtz Wealth Management, suggests that now would be a good time to take a break from buying shares of Netflix due to the company's recent strong stock performance. Brown stated that he sold his shares of Netflix after the stock had increased by 40% in the last three months, ahead of the company's fourth-quarter earnings report. Despite the possibility of positive results, Brown chose to not hold onto the shares due to uncertainty about how investors may react to the stock. Netflix enjoys a substantial first mover advantage and seems primed for continued growth. Even so, the company will need to do more than rest on its laurels to keep its subscribers from migrating – particularly in the wake of news that the streaming giant would be introducing ads to the service; a move that could increase revenue but alienate users.  

Amazon (AMZN) 

To consider Amazon as a streaming company would be wildly off the mark, as the company is comprised of an extremely well diversified portfolio of businesses. However, Amazon's streaming service, known as Amazon Prime Video, has been relatively successful thus far. Prime Video offers a wide variety of content, including original programming, licensed TV shows and movies. The service is, rather cleverly, included with an Amazon Prime membership which technically makes it the larger streaming service, at least in the US. Amazon has invested heavily in original content, including award-winning shows like "The Marvelous Mrs. Maisel" and "Transparent," which have helped to drive subscriber growth. Additionally, Prime offers some significant competitive advantages over competitors by including other prime services such as faster Amazon delivery within their memberships. These benefits extend to investors as well. Amazon represents a significantly more diversified asset compared to other pure play streaming competitors.  

Amazon has diversified its business vastly beyond being just an online store to an entire ecosystem of products and services. The company has expanded into various verticals, including everything from Amazon Prime, Prime Video, Music, AWS, Kindle, Alexa, Merch and the Fire Phone to the acquisition of Wholefoods in 2017. AWS in particular, generates a significant amount of Amazon's profits, serving a wide range of businesses and entities. In addition to this impressive risk spread the company greatly outperforms the rest of the industry when it comes to revenue. Its net income is growing at a staggering 69% and its return on invested capital is more than double what is typical of the sector. Perhaps this is why analysts seem so bullish when it comes to Amazon, with over 90% ranking the company as a ‘buy’. Overall, it seems tough to imagine a world without Amazon and the company seems here to stay for both investors and streaming clients alike.  

Disney (DIS) 

The Walt Disney Company is one of the world's most successful media and entertainment companies. It was founded by Walt Disney and Roy O. Disney in 1923 and has since grown to become a global empire with a diverse range of businesses including media networks, parks and resorts, studio entertainment, and consumer products. In recent years, Disney has established a strong presence in the streaming market with its streaming service Disney+ which launched in 2019, featuring a wide range of content including original programming, films and television shows from Disney, Pixar, Marvel, Star Wars, and National Geographic, which has been a huge success among audiences. However, while Disney is as firmly cemented of a household name as they come, the company has been struggling to post attractive financials in recent quarters particularly when it comes to the ramping costs associated with its streaming service.  

Disney's strategy of offering lower prices than its competitors, as seen in its lower average revenue per user (ARPU), has contributed to the fast growth of its streaming service Disney+. However, this strategy has also yielded a lower profit margin for the company and significant losses in its direct to consumer (DTC) business. Disney's focus on growth over profit and poor management practices have led to higher operating costs without a corresponding increase in sales, resulting in losses of over $8.6 billion since the end of 2019. This trend has continued to worsen, with Disney running promotions that further lower ARPU to maintain positive subscriber growth rates. This has produced a bigger operating loss in FY 2022, with operating costs and selling, general and administrative costs increasing by 32% YoY and 30% YoY respectively. However, even considering profitability issues Hightower’s Stephanie Link says, “Disney is a stock I want to own” and she is not alone, with over 80% of analysts still ranking Disney as a ‘buy’. Perhaps with internal pressures for board seat reshuffles within the company, new management figures can make Disney as attractive of an asset as it deserves to be in 2023.