Cord cutting remains a major trend in the media industry — and there are few signs that it will slow down any time soon. Just look at a recent report from S&P Global Market Intelligence’s Kagan research division. In the latest quarter, there was a loss of 1.2 million subscribers to cord cutting. Interestingly enough, some of these are cord nevers, which are people who have never subscribed to a traditional TV service.
As should be no surprise, the cord cutters are mostly from younger generations, like the Millennials. They like the flexibility of streaming services as well as the reasonable pricing.
Now of course, predicting the number of cord cutters is kind of dicey. But based on data from eMarker, there will be 51 million by 2021.
So how should investors play this major trend? Well, of course, there are the streaming players, which will likely continue to grow. But there are also be traditional media companies that will be able to adapt and thrive.
OK then, here’s a look at three stocks to buy:
Stocks To Buy: Roku (ROKU)
Roku (NASDAQ:ROKU), which sells hardware for streaming, has hit some turbulence. And it’s not just about the correction in the tech sector.
ROKU stock has taken hits because of new competitors entering the market, such as Alphabet’s (NASDAQ:GOOGL) Chromecast or Amazon’s (NASDAQ:AMZN) Fire Stick. The latest earnings report was also a let down.
Now while such things are concerning, I still think ROKU stock’s future looks promising and that the recent falloff in the shares is an attractive opportunity, especially for those with a long-term bent.
Note that a deceleration is inevitable as the torrid growth rates cannot last forever. But in the latest quarter, the licensing and ad sales still jumped an impressive 74% to $100 million. There was also a 43% increase in active accounts to 23.8 million and streaming hours spiked by 63% to 6.2 billion. So far this year, more than one in four smart TVs sold in the US were Roku TVs.
According to the ROKU shareholder letter: “We are just starting to witness the massive transition of TV viewing and TV advertising to streaming. Roku is leading the way on the technology front with an operating system that is purpose-built for TV — versus more heavyweight mobile operating systems — and innovative services like The Roku Channel.”
Wall Street analysts also remain bullish on ROKU stock, with the price target at $76. This assumes 67% upside from current levels.
Stocks To Buy: Netflix (NFLX)
Although Netflix (NASDAQ:NFLX) was founded over 20 years ago, the company still looks more like an innovative startup. It has been able to pull off major changes to its business, such as transitioning away from DVD delivery to streaming as well as going big on original content. All in all, the moves have been spot-on.
Netflix has essentially become synonymous with streaming. In the most recent quarter, the company added nearly 7 million new subscribers for a total of 137 million.
This base is critical as it provides the resources for the content strategy — which is far from cheap. For 2018, NFLX is expected to shell out $8 billion for original programming.
Another key for NFLX is global expansion. Consider that the company has been quite successful in developing offerings for a myriad of countries, which shows the power of the company’s business model.
But perhaps the most attractive country is India, which has roughly 450 million Internet users and half of them watch video services like Google’sYouTube. According to Netflix’s chief content officer Ted Sarandos, the country could provide more than 100 million subscribers. To this end, the company has been ramping its original content offerings, which have shown traction (shows like Sacred Games and Ghouls). There are also partnerships with companies like Bharti Airtel that should help propel the acquisition of subscribers.
Stocks To Buy: Disney (DIS)
Among the stocks to buy for cord cutters, Walt Disney (NYSE:DIS) may seem a bit of an odd choice. Let’s face it, the company has major broadcasting and cable businesses, such as with ESPN.
Regardless, DIS stock does look positioned nicely to benefit from cord cutting. First of all, its ESPN+ streaming service has gotten off to a nice start. During the past six months, it has added over one million customers.
Next, DIS has a treasure trove of franchise assets like Lucasfilm, Marvel, Pixar and Disney Animation. The company is also spending a $71.3 billion for Twenty-First Century Fox (NASDAQ:FOXA), which has a valuable library that includes “Avatar” and “X-Men.”
With all this content, the company plans to roll out its Disney+ streaming service later next year. Just some of the benefits include: rich data on customer behavior; recurring revenues; and synergies with other assets like the parks, resorts and consumer products.
Finally, as seen with the latest quarter, Disney is running on all cylinders, with revenues up by 12% to $14.31 billion and earnings increasing by 33% to $2.32 billion. The valuation on DIS stock is also reasonable, at only about 14 times earnings. In fact, during the recent drop in the markets, the shares have been resilient, off only about 3% during the past month.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
