Film-makers DreamWorks (DWA) and Lions Gate (LGF) are poised to benefit from an array of positive catalysts, including increased demand for movie rights and the growth of the Asian film market.
As a result, both DWA stock and LGF stock should rise significantly over the next year, and longer-term investors should snap up their shares.
One of the trends boosting DWA and LGF stock is the surge in online streaming.
The number of companies providing entertainment content over the Internet is growing rapidly. Sony (SNE) and DISH Network (DISH) have launched Internet TV services in recent months, and Overstock.com (OSTK) and Apple (AAPL) are expected to enter the sector soon.
Moreover, incumbent Internet TV operators, including Hulu, Netflix (NFLX) and Amazon (AMZN), are constantly looking to purchase the rights to more movies. In this high-demand environment, the prices of the rights to top-notch movies are bound to rise significantly, boosting the bottom lines of LGF and DWA,
Riding the Chinese Box Office Higher
Both companies have deals that leave them very well-positioned to exploit the exploding Chinese film market. Total box office receipts in China jumped 34% to $4.8B in 2014 and are expected to rise nearly 25% this year. Meanwhile, the country’s leading Internet companies are also accelerating their spending on distributing film content.
According to The Hollywood Reporter, LGF is collaborating with China’s Hunan CATV Network Group Co., a subsidiary company of Hunan TV & Broadcast, which reaches more than 15 million subscribers. The second most popular broadcaster in China, Hunan TV is co-financing a number of Lions Gate’s feature films, the magazine noted.
For its part, DWA is collaborating with three Chinese companies on a joint venture called Oriental Dreamworks which specializes in developing animated TV production, live action films, and live action TV for the Chinese market. In an effort to expand to other parts of Asia, Dreamworks announced in late 2014 that it would launch a new TV channel in the second half of this year that will be available in 19 Asian countries.
Lions Gate’s and Dreamworks’ forays into the Far East expose them to rapidly growing markets, and they could make the film-makers takeover targets. It is no secret that Chinese e-commerce giant Alibaba (BABA) has been looking to buy entertainment content companies, and Japan’s Softbank (SFTBF) has already reportedly expressed interest in buying DWA. The companies’ experience in Asian markets increase their adeptness at creating programming for those markets, making them more attractive takeover targets for giant companies from the region.
DWA, LGF Keep Making Good Movies
And as far as movie-making fundamentals, Dreamworks and Lions Gate have been doing pretty well lately. In recent years DWA had made several movies that did not perform well at the box office, but the studio regained its magic touch with Home, released earlier this year. Carrying a price tag of about $130 million, the film generated $170M in revenue, putting its box office take just below past hits like How to Train Your Dragon 2, and above Kung Fu Panda 2.
The success of Home, which featured the voices of stars Jim Parsons, Rihanna and Jennifer Lopez, should enable DreamWorks to convince other top names to lend their voices to its movies going forward.
Lions Gate has shown a knack for choosing strong movie franchises — its Twilight, Hunger Games and Divergent series have all performed very well at the box office. The company’s upcoming movies include The Hunger Games: Mockingjay — Part 2, the final installment of the billion-dollar Hunger Games franchise.
Bottom Line
DWA stock and LGF stock have had variably success in the past year. LGF stock is up 32% over the last year, but has only risen 9.5% in 2015. DWA stock is the mirror image, up 25% for the year-to-date, but flat over the past 12 months.
Leveraged to fast-growing Asian markets and showing strong movie-making ability, Lions Gate and Dreamworks are in good position for the immediate future. And if investors are really lucky, one or both stocks might even become takeover targets.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
