It turns out running a profitable streaming video service is not as easy as Netflix (NASDAQ:NFLX) makes it look.
The industry leader reported first-quarter revenue of $9.4 billion, generating net profits of $2.3 billion. Operating margins of 28% are golden. These are numbers the competition can only dream of.
Instead, the landscape is becoming littered with also-rans, services that launched during the Covid lockdown era, when attracting subscribers was easy. Now that out-of-home activities are the norm once more, we’re confronted with more streaming stocks to avoid than to buy. Service cancellations are soaring.
Chartr reports industry site Antenna data indicates customers are cutting the cord with streamers at an alarming rate. It says there were “a whopping 50.4 million streaming service cancellations in the first 3 months of the year.” Two years ago, fewer than 28 million subscribers cancelled their services, so churn is accelerating.
Their biggest hope for recovery lies in free, ad-supported streaming TV (FAST). For the first time, Antenna saw more new subscribers signing up for FAST services than any other option. Over 50% of all new gross additions were in ad-supported tiers.
As the streaming landscape rapidly evolves, these are the three streaming stocks to avoid now.
Disney (DIS)
Disney (NYSE:DIS) is on this list because CEO Bob Iger failed to follow through on his promise to turn around the company by avoiding embroiling the company in the culture wars. The entertainment giant’s movie and streaming catalog remains steeped in identity politics that turn off large swaths of fans. It seems clear it will eventually impact the whole business.
Disney’s Inside Out 2 hit proves people will flock to a film that doesn’t preach to them. Still, its films continue to rack up large losses, including its once-powerful Marvel franchise. The Disney+ streaming shows have also failed to gain any traction. The recent Star Wars spinoff The Acolyte is the lowest-rated Disney+ streaming show ever, with a 14% rating on Rotten Tomatoes.
The streaming service heavily contributed to the $2.6 billion in losses Disney services suffered last year, though it did report a small profit in May. While Disney has over 200 million subscribers, that’s spread across Disney+ and Hulu.
The crown jewel of Disney’s empire is its theme parks. Yet investors need to question if the entertainment stock is turning off fans at the box office and on TV, how long will it be before it trickles down to the parks? For that reason Disney is a streaming stock to avoid.
Warner Bros. Discovery (WBD)
AT&T (NYSE:T) saddled Warner Bros. Discovery (NASDAQ:WBD) with a heavy debt load, making it the next streaming stock to avoid. The streamer reported $39.1 billion in long-term debt at the end of the first quarter and another $3.4 billion in short-term debt. It had less than $3 billion in cash.
Revenue from its streaming services HBO and Max was flat year-over-year, though adjusted profits did rise to $80 million as it heavily pared down selling, general and administrative expenses. The streaming segment, though, had fewer than 100 million subscribers, albeit 2 million more than it had a year ago. Executives from all major studios, however, agree the 200 million subscriber mark is the threshold that makes a service viable.
“If you’re going to be a full entertainment service with live sports and tent-pole blockbusters today, 200 million is a number that can give you the scale with the hope for growth over time,” The New York Times quoted Amazon’s (NASDAQ:AMZN) chief of Amazon Prime, Mike Hopkins, as saying. Former Disney CEO Bob Chapek agreed, saying 200 million means “you’re big enough to compete.”
Warner Bros. Discovery stock is down 37% this year and off 45% over the past 12 months. While it did make a small profit on streaming, it was only by including HBO sales to cable outlets that it did so.
Paramount Global (PARA)
Last on the list of streaming stocks to avoid is Paramount Global (NASDAQ:PARA), which has been trying to sell itself to anyone with a wallet. Its stock is down 27% this year and 33% from where it stood one year ago.
The owner of the Paramount movie studio, CBS, various cable channels and the Paramount+ streaming service, Paramount Global has failed to gain much traction. It lost $1.6 billion on streaming last year. That was fueled by its high subscriber churn rate, which Antenna says was 7% in 2023. Paramount+ has 71 million subscribers, with 3.7 million net additions in the first quarter.
Like other streamers, Paramount is seeing revenue growth because of higher FAST numbers. Its ad revenue jumped 31% last quarter. It also raised prices for its services. Just last month Paramount+ eliminated its $10 tier and created a new $12 level that also included its Showtime service.
With a sale all but dead, Paramount Global has no clear catalyst for growth. That is why it is a streaming stock to avoid.
On the date of publication, Rich Duprey held a LONG position in T and WBD stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
