2022 was a bad year for streaming companies and the broader tech sector. Video-streaming pioneer Netflix (NASDAQ:NFLX) imploded by around 74% at its worst. Subscriber losses due to macro headwinds and intensifying competition played a part in the stock’s sell-off. Streaming used to be innovative and full of growth potential. Now, as it matures, it’s become another struggling industry. Questions linger as to whether the streaming space can find its feet after subscription cancellations peak. I am most bullish on Disney stock (NYSE:DIS), while Warner Bros. Discovery (NASDAQ:WBD) also has potential. I am less optimistic about Netflix and Paramount (NASDAQ:PARA), however.
With a recession on the horizon, paid cancellations could increase as more people look to reduce their monthly expenses. Undoubtedly, some of us have too many streaming subscriptions, which we may not be using nearly as much as when we signed up for a free month trial.
Ad-based tiers are sure to turn some cancellations into tier downgrades. As Netflix moves into uncharted waters, we’ll see how it fares as the streaming space looks to heal from one of its worst years.
Netflix: Ad-Based Tier Could Give Shares a Jolt
As certain streaming heavyweights, like Netflix, embrace ad-based tiers, there’s hope that consumers will downgrade from a premium ad-free tier to a cheaper ad-supported tier. Undoubtedly, must-see content on Netflix could push budget-constrained users to deal with the occasional ad for added savings.
In that regard, I think Netflix’s value proposition increased in a recession year. However, the main question is whether lower-cost tiers will wreak havoc on premier plans, as the password-sharing crackdown looks to shake a few dollars from the pockets of freeloaders.
Recently, some analysts upgraded Netflix over its ad-based “catalyst” and content strength versus rivals. Really, nothing new enticed such upgrades.
For now, Netflix remains a leader in the space. The 26.4 times trailing earnings multiple seems to be in the right spot. As the company doubles down in gaming, I’d look for its valuation multiple to expand, especially if Netflix’s first triple-A “shooter” title that’s supposedly in the works winds up a success.
The way I see it, Netflix is a streamer with plenty of game. This separates it from the pack and could help it end 2023 as a winner.
Big Media Companies Duke it Out
Big media firms like Warner Bros. Discovery, Paramount, and Disney have also felt intense pressure this past year. Compared to Netflix, they’re underdogs that could be left behind as Netflix continues to produce sticky content while improving its value proposition, either through lower-cost tiers or the inclusion of complementary video-game titles.
Warner Bros. Discovery’s production cuts have not been a source of investor enthusiasm. Meanwhile, Paramount and Disney have been experiencing solid growth, but there are doubts that each firm can continue to take share from the likes of Netflix as consumers look to trim their entertainment budgets.
Each media streamer is absurdly cheap. WBD trades at 1.0 times sales, 0.5 times book value, and 11.3 times cash flow. Warren Buffett-owned Paramount trades at an even steeper discount, with PARA stock going for 0.4 times sales, 0.5 times book value, and a 4.3 times trailing earnings multiple.
Despite having a potential Netflix dethroner in Disney+, DIS stock trades at a mere 2.0 times sales and 1.7 times book value.
Undoubtedly, these cheap media-firms-turned-streamers have a lot of baggage. If they’re to take a lot more market share from Netflix, they’ll need to improve their value proposition, not by lowering prices, but by going all-in on content production.
With management shuffling that saw Bob Iger return to Disney, there’s bound to be a mess over there. Still, I think the firm has a gem in Disney+ that could dethrone Netflix as the House of Mouse continues pouring billions into the platform.
Disney stock has been hit hard. As Iger looks to work his magic in Disney+, ESPN+, Hotstar, and Hulu, I’d look for Disney to end 2023 much stronger than it started.
As for WBD and Paramount, the future isn’t so clear. Warner Bros. Discovery’s merging of HBO Max and Discovery+ could succeed if it can get the pricing right. Despite budget cuts, I view Warner Bros. Discovery as a better bet than Paramount. Ultimately, I think WBD will be a winner in 2023. I’m not sure about Paramount, which isn’t all that much cheaper than WBD.
The Takeaway: Disney Could be the Biggest Winner
I’m upbeat on streamers this year after the devastating beatdown they endured last year. Personally, I think Disney will be the biggest winner. The stock is cheap, and Iger’s comeback could be a huge catalyst.
Warner Bros. is also likely to be a winner as it moves on from cost cuts and launches its new platform. The stock is also so cheap!
Finally, Netflix and Paramount are two streamers that I’m not as sure about.
