Streamers stealing awards and market share

This portends a rise in prominence of streaming service providers. With more well-funded players about to enter the arena, streaming is set to become a high-stakes game, fuelled further by consumers increasingly ditching linear cable TV subscriptions for more pocketbook-friendly streaming plans. These trends create strong growth tailwinds for select SVOD (subscription video on demand) providers and present a compelling investment opportunity for long-term investors looking to get in on the streaming play.

The biggest pure-play streaming name, Netflix (NFLX) introduced the concept of ad-free binge-viewing that triggered cord-cutting among consumers. The video-streaming giant had 158 million paid subscribers worldwide by the end of last quarter. With a whopping 34 Golden Globes nominations haul and 24 Oscar nomination nods, Netflix joined the league of big filmmakers both in terms of content production and critical acclaim.

Netflix’s Q3 earnings report claimed it planned to splurge a whopping US$15 billion on content in 2019, by far the most in the industry. Thanks to a rapidly growing subscriber base, Netflix collects and mines its large consumer data to tracks every viewer's interaction. It then leverages it “to better purchase content as well as finance and produce original material such as Stranger Things," says Morningstar equity analyst Neil Macker, who pegs the stock’s worth at US$135.

With greater content generation, not only does Netflix strengthen its relationship with existing subscribers, but it also attracts new customers via word of mouth and media buzz from award nominations. Macker forecasts Netflix’s annual revenue to grow 11% domestically and 18% internationally between 2019 and 2023.

According to the 2018 Sandvine Global Internet Phenomena Report, Netflix accounted for 26% of all global video streaming traffic, beating out YouTube at 21% and Amazon at 6%. The average Netflix user worldwide now watches more than 90 minutes of video each day.

Among the world’s highest-grossing online retailers, Amazon (AMZN) amassed a staggering US$233 billion in net sales in 2018. The tech behemoth generated 53% of its 2018 revenue from online product and digital media content sales. The company’s market cap is flirting with the US$1 trillion mark, even breaching it last year, promising to rejoin the elite group of companies with the highest market valuation.

Amazon, which makes and acquires film and TV content through its subscription-based Amazon Prime Video, took home two Golden Globes for the comedy series Fleabag, having dropped an estimated US$7 billion on content in 2019.

“Amazon has made several investments in sustaining its moatworthy business models, including its global fulfillment infrastructure, a vast portfolio of audio and video content, and Amazon Web Services capacity,” says a Morningstar equity report.

Prompted by Amazon’s third-quarter earnings report, and a belief in “the emergent avenues of growth such as advertising, subscription services, international retail, [among others],” Morningstar equity analyst Zain Akbari appraised the stock to be worth US$2,300.

Wide-moat Amazon’s revenue is projected by Morningstar to clock 16% growth for the five years ending 2023, underpinned by “contribution from physical retail formats, greater engagement among Amazon Prime members, and increased third-party sales from its suppliers, digital content sales, international expansion,” and others, asserts Akbari.

Legacy entertainment powerhouse, Walt Disney (DIS) owns universally loved Mickey Mouse and Buzz Lightyear characters and makes films under Pixar, Marvel, and Lucasfilm films studios. Disney’s other assets include ESPN, ABC, and Disney Channel, television production studios, theme parks and resorts.

The company recently rolled out its own streaming service Disney+ to a roaring start, bagging more than 10 million subscribers on its first day of launch. With a rich and robust library of entertainment content, Disney’s streaming service carries heft that rivals will struggle to match.

The House of Mouse had yet another bumper year as it accounted for nearly 40% of the 2019 U.S. box office. Six of Disney-produced movies each made more than US$1 billion, while the entertainment giant grossed more than US$10 billion overall globally. It has a solid slate of blockbusters for 2020, including Jungle Cruise, Mulan, and Black Widow. Disney also owns hit films Free Guy, West Side Story and The King’s Man, as part of its acquisition of 20th Century Fox last year.

“The addition of the entertainment assets from 20st Century Fox should help the firm continue to generate excess returns on capital, ” says Macker, who pegs the wide-moat stock’s fair value at US$141, adding that the company’s  “stable of animated franchises will continue to grow as more popular movies get released by the animated studio and Pixar.”

Silicon Valley giant Apple (AAPL) is bulking up its subscription-based services to offset cooling hardware sales, particularly the iPhone. As part of that growth strategy, Apple recently launched Apple TV+, its streaming venture for which it has roped in several Hollywood heavyweights including Steven Spielberg, J. J. Abrams, Octavia Spencer and Jennifer Aniston. The iPhone maker’s other subscription-based offerings include Apple Arcade, a video game service, and Apple News Plus, a news service.

The tech major has reportedly spent US$6 billion on new TV shows and films to push out original content on its streaming service. The bet appears to be paying off as Apple bagged its first Golden Globe nomination for The Morning Show.

“The firm’s additional products and services (Apple Watch, iCloud, Apple TV+, AirPods, Apple Pay) act as both supplemental revenue opportunities and, more importantly, critical enhancements to the iOS ecosystem that supports Apple’s crown jewel: the iPhone,” says a Morningstar equity report.

These products and services will make it more challenging for its roughly 1.4 billion active Apple device users to leave the iOS ecosystem. Despite having doubled in value over the past year, shares of Apple have been on a tear this year due to stronger than expected iPhone sales in China, prompting Morningstar sector strategist Abhinav Davuluri to raise the stock’s fair value from US$200 to US$220.