Media stocks have fallen off a cliff over the past six weeks alongside the rest of the market, on concerns that the rapidly spreading novel coronavirus outbreak will bring the global economy to a screeching halt.
The thinking is pretty simple. Amid a pandemic-enforced quarantine, consumers won’t be able to go out and spend money on discretionary items. Companies that sell discretionary items will thus cut back on ad spend. Many media companies make most of their money off ad dollars, so as companies cut ad spend over the next few weeks, that will naturally hit media companies hard.
Consequently, the Invesco Dynamic Media ETF (NYSEARCA:PBS) is down more than 30% year-to-date.
But recent pain in media stocks may prove to be temporary, and this dip may prove to be a golden buying opportunity.
The thinking here is similarly simple. It increasingly appears that, thanks to strict social distancing measures, the coronavirus pandemic will peak in Europe sometime in early April, and in the U.S. by mid-April. By early-to-mid May, the U.S. economy will turn back on. Consumers will come out and spend again, probably with more vigor due to being cooped up inside for more than a month.
As consumers re-up their spending in the back half of the second quarter, companies will re-up their ad budgets, and media stocks will bounce back.
With that in mind, here’s a list of strong media stocks to buy on the coronavirus dip before the big rebound later this year:
- Disney (NYSE:DIS)
- Netflix (NASDAQ:NFLX)
- Facebook (NASDAQ:FB)
- AT&T (NYSE:T)
- Roku (NASDAQ:ROKU)
- Spotify (NYSE:SPOT)
- Pinterest (NYSE:PINS)
Strong Media Stocks to Buy: Disney (DIS)
Global media icon Disney is one of the best media stocks to buy on recent weakness for three big reasons.
First, the stock has been beaten up to multiyear low valuation levels. Over the past six weeks, Disney stock has dropped more than 30% to trade at just 20-times forward earnings, its lowest multiple during the Disney+ era (which has caused some natural value inflation, thanks to potential streaming upside).
Second, this is one of the most stable companies in the world, supported by a huge, asset-loaded balance sheet, tons of liquidity and a multi-decade history of surviving downturn after downturn. In other words, if anyone can and knows how to manage through a crisis like coronavirus, it’s Disney.
Third, the company is well positioned to boom in the back half of 2020, on the back of strong Disney+ growth, pent-up consumer demand to visit Disney parks and a strong big picture content slate. Improving media ad spending trends in the back half of 2020 will also boost Disney’s legacy broadcasting business.
Overall then, Disney stock is beat up and dirt cheap. Meanwhile, the company has enough resources to weather the current crisis and ample firepower to rebound once the crisis passes. That makes DIS stock look like a compelling buy on the current dip.
One media stock that has been hammered alongside the rest of the market — but which shouldn’t even be down — is Netflix.
There is some concern out there that, because Netflix is a “discretionary” purchase, Netflix’s global growth narrative will slow as the coronavirus pandemic slows the global economy and kills consumer discretionary spend.
But, in a world where everyone is stuck at home, Netflix becomes less of a “discretionary” purchase, and more of a “must-have”.
That is, consumers need something to do while they are stuck at home. Netflix is the king of at-home entertainment, with the world’s largest library of on-demand movies and TV shows. The service is also fairly cheap, at just roughly $10 to $15 per month. Connecting the dots, it’s quite likely that so long as this pandemic keeps spreading, Netflix’s subscriber growth trajectory will actually improve.
Yet, NFLX stock is more than 5% off its recent highs.
Sure, that means the stock is still outperforming the rest of the market. But this stock should be at all time highs, given that its business is presumably firing on all cylinders right now. As such, any weakness here in Netflix stock is a buying opportunity.
Of all the potential media stocks to buy on the dip, the most attractive is probably Facebook.
Facebook is a long-term winner. The company owns four social media apps. All of them have over a billion users. All them are exceptionally sticky, and have become digital utilities. Only two of them are fully monetized (Facebook and Instagram). The other two (WhatsApp and Messenger) are still largely ad-free. Meanwhile, all four apps have a huge opportunity in front of them to turn their billions of users, into billions of shoppers.
In other words, Facebook is a huge company, with a huge moat, and tons of growth potential ahead through increased ad real estate and a push into e-commerce.
Sure, the company’s numbers in the near-term won’t be great. A weak digital ad market in March and April will naturally weigh on Facebook’s revenue growth rates in the first and second quarter.
But, this is a near-term headwind, in a long-term winning company. By the third quarter, digital ad spending trends will rebound. Facebook’s growth rates will rebound, too. The company will get back on its long-term winning trajectory.
And FB stock — which trades at a relatively low 18.5-times forward earnings — will bounce back to $200-plus levels.
One of the less exciting — but still very strong — media stocks to buy on the dip includes telecom giant AT&T.
AT&T is less exciting than most of the other media companies on this list because of its muted growth profile. That is, while the likes of Facebook and Netflix are steady 20%-plus revenue and profit growers, AT&T’s profits are expected to be flat this year, and rise just 6% next year.
But, what AT&T lacks in growth, it makes up for in stability.
AT&T provides necessary services which consumers across America will continue to pay up for, regardless of the economic backdrop. These services include irreplaceable utilities like internet connectivity and wireless coverage. Steady demand drivers will enable AT&T to report slow and steady revenue and profit growth for the next several years.
For that slow and steady growth, investors have to pay just 8-times forward earnings. They also get a 7% yield.
This combination of steady growth, dirt cheap valuation, and sky high yield is quite attractive. It ultimately sets T stock up to deliver significant returns from current levels over the next few quarters.
While AT&T is one of the least exciting media stocks to buy on the dip, Roku is one of the most exiting media stocks on this list.
By selling streaming devices which enable consumers to access their favorite streaming services, Roku has essentially transformed into the cable box of streaming TV. That is, the streaming TV world is no longer a “one service” world. There are tons of streaming services out there, and tons of subscribers to each of those services, too. Much like a cable box did in the linear TV world, Roku organizes all that supply and demand, and seamlessly connects consumers to streaming services through a centralized access point.
Being in that position puts Roku at the heart of the streaming TV world, and will enable the company to earn the lion’s share of the billions of ad dollars that will inevitably flow from the linear to streaming TV channel over the next few years.
This robust long-term growth narrative is not adversely impacted by the coronavirus pandemic. Sure, ad spending trends will be depressed in March and April. But that’s a near-term headwind which will clear up by summer.
Long-term, nothing changes. Consumers will still migrate from linear to streaming TV, many of those consumers will continue to use Roku to access streaming services, and ad dollars will continue to chase that engagement.
Yet, ROKU stock presently trades 40% of its 2020 highs.
This huge selloff, despite minimal long-term growth impact, presents investors an opportunity to buy into a long-term winner at a significantly discounted price.
The bull thesis on streaming music giant Spotify has two parts.
First, the company should be impressively resilient to the coronavirus pandemic. That’s because: 1) most of this company’s revenues are from consumer subscription dollars, and 2) the company’s consumer growth trajectory is likely accelerating amid the outbreak. As such, Netflix’s first-half 2020 numbers should actually be pretty good, and not reflect much coronavirus-related weakness.
Second, Spotify is increasingly turning into the “Netflix of streaming music”. At one point in time, there were plenty of concerns that competition would derail the Spotify growth narrative. That hasn’t happened. Spotify has leveraged a broader content library, a better app experience, and consistent product innovations like song recommendations to thwart competitive risks, and sustain huge growth and industry leadership.
So long as the company keeps doing this, Spotify’s revenues and profits will keep running higher, and SPOT stock will soar.
Especially from today’s depressed levels.
As such, recent weakness in Spotify stock looks more like a buying opportunity into a long-term winner, than anything else.
Last but not least on this list of strong media stocks to buy is the significantly beat up Pinterest.
On concerns that digital ad spending trends will deteriorate significantly amid the pandemic — and that Pinterest is one of the newer and therefore weaker players in that digital ad market — Pinterest stock has sunk to all time lows in March.
But, these concerns are both unnecessarily short-sighted and overblown.
On the short-sighted front, the coronavirus pandemic won’t last forever. Most data suggests it will “blow over” by May or June. Consumer spending trends will consequently rebound by the summer. So will digital ad spending trends. That will provide an upward lift for Pinterest’s growth trajectory.
Meanwhile, on the overblown side, Pinterest actually offers a compelling and unique value prop in the digital ad industry. Its visitors are already visiting the site with an intention to do something or find something, and are therefore fairly willing to act on a relevant and targeted ad. Consequently, once digital ad trends rebound, Pinterest’s growth trends should rebound by more.
Big picture — this company is very undervalued at current levels. Long-term upside potential is enormous. Near-term downside risk is mitigated. That makes for an attractive combination to buy the dip.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long NFLX, FB, ROKU, and PINS.