Streaming stocks have been in the penalty box for a while. Notably, investors have been questioning their ability to pivot to profitability. But sentiment is so negative, and valuations are very depressed that it wouldn’t take much to generate positive returns going forward.
Indeed, streaming losses have been a headache over the past two years. Apart from Netflix (NASDAQ:NFLX), all the other peers are losing gobs of money from their streaming businesses. Although the companies have been working to cut costs and turn a profit, progress seems much slower.
Besides, the writers and actors strike only works to lengthen the path to profitability. Yes, these services might get a boost in the short term due to reduced content costs. But over the long term, they need a deep content bench to keep subscribers.
Still, looking at the bigger picture, the streaming companies discussed below are too cheap to ignore. Over the past year, they have focused on reducing costs and streamlining operations.
Moreover, streaming has a total addressable market of $554 billion and will grow at a 19% compounded annual growth rate between 2023 and 2030. As these streaming stocks gain subscribers and raise prices, profitability will improve.
Warner Bros. Discovery (WBD)
Warner Bros. Discovery (NASDAQ:WBD) streaming service Max is one of the top streaming services due to its best-in-class content. Indeed, its content pedigree is unquestionable, considering that HBO and Max garnered 127 Emmy nominations, the highest among streaming services.
However, investors are only interested in free cash flow and debt paydown for now. Unfortunately, the WarnerMedia and Discovery merger saddled the company with too much debt. As of the end of the second quarter of fiscal year 2023, it had $47.8 billion in debt.
So far, debt repayment efforts are going according to plan. The company reported $1.7 billion in free cash flow in the second quarter. It used up $1.6 billion to repay debt, ending the quarter with 4.6x net leverage.
Notably, CEO David Zaslav wants to make Warner Bros. Discovery the greatest media company in the world. We’ll see how that goal plays out. In terms of current results, the direct-to-consumer business is performing as expected. While it lost 1.8 million global subscribers quarter-over-quarter, revenues increased 14% ex-FX year-over-year.
Looking at valuation, WBD stock is a bargain. According to management, they expect fiscal year 2023 free cash flow in the range of $4.5 billion to $5 billion. This means the company is trading at 7 times forward free cash flow. That’s a bargain valuation for a business that could grow on multiple fronts.
Disney (DIS)
Considering that Disney (NYSE:DIS) is hovering around five-year lows, it’s worth a look. Indeed, the House of Mouse has had several headwinds, such as rising direct-to-consumer costs and the recently resolved carriage dispute with Charter Communications (NASDAQ:CHTR). And ahead lies the upcoming Hulu negotiations, the writers and actors strike, and legacy asset problems.
Investors are right to be cautious about the stock. However, they shouldn’t underestimate the power of the brand. According to Statista, Disney is the fifth most valuable media brand, highlighting its strength.
It’s the king of content and owns Pixar Animation Studios, renowned for pioneering computer-animated films like Toy Story and Finding Nemo. Also, Disney owns Marvel Studios, famous for iconic characters like Iron Man, Spider-Man, and Lucasfilm, which houses the legendary Star Wars franchise. These powerhouses, plus 20th Century Fox, provide a best-in-class content generation machine.
Secondly, significant cost cuts that will usher in profitability in the DTC business are underway. Attracting consumers to its streaming platform, Disney+ has not been a problem. Disney+ alone had over 105.7 million subscribers as of July 2023. That’s tremendous growth within three years of launch.
The primary issue has been DTC losses but there are positive signs. Since the company announced cost cuts the losses are quickly narrowing. In the Q3 FY2023, the loss was $512 million, narrowing from $1.061 billion in the prior year quarter. Also, the company is on track to exceed the $5.5 billion in cost savings it had targeted.
With more cost savings, this entertainment giant profits and free cash flow will increase. Considering the overly negative sentiment, it is time to buy one of the most undervalued streaming stocks. As of this writing, the consensus EPS estimate for FY2024 is $4.96. That’s a 16 times forward price-to-earnings for one of the best entertainment businesses.
Netflix (NFLX)
After the -5% sell-off on September 13, Netflix (NASDAQ:NFLX) is one of the best opportunities in streaming stocks. Chief Financial Officer Spence Neumann comments that the ads tier wouldn’t drive revenue in the short term and were not well received by the market.
However, the company is in a superior position to other streaming stocks. It has one significant advantage – no legacy and traditional TV assets.
Furthermore, in terms of free cash flow, it is the most profitable streamer. In the last trailing twelve months, it generated $18 billion in free cash flow. Given the profitability, analysts are bullish despite the huge year-to-date run. TipRanks analysts have an average price target of $473. As of this writing, the target represents over 16% upside.
Loop Capital recently upgraded the stock to “buy.” Analyst Alan Gould also increased his price target from $425 to $500. He noted that Netflix’s more extensive pipeline of unreleased content positions it perfectly to deal with the writer and actor strikes.
Overall, Netflix is well positioned as streaming becomes a larger portion of viewership. While peers must worry about declining traditional TV, its only worry will be increasing its streaming market share.
Netflix’s trailing twelve-month revenues were only $32 billion. Notably, there is incredible room for growth considering the total addressable market is greater than $500 billion. Furthermore, although advertising revenues are tiny, they will only grow as that business scales.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
