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Tension Builds Up in Streaming Content Space: 4 Picks

Zacks

Heavy investments by players on streaming content have sparked a competitive war in the rapidly growing market.

With the increase in the number of cord cutters, streaming services are poised to become the next big business opportunity. Per Research firm MarketsandMarkets, the video streaming industry is anticipated to grow at a CAGR of 18.2% from 2017 to 2022 to reach $7.5 billion by 2022.

Given the high growth opportunity, all the companies are undertaking various initiatives like creating more regional along with kids and family-oriented content to create a diverse subscriber base. The key differentiator for attracting new subscribers is the proliferation of the content portfolio with a fine balance of domestic and regional programming.

Let’s focus on four stocks that have the most attractive content pipeline and are gearing up to expand their addressable market.

Netflix NFLX

Netflix is undoubtedly the “King of Content” which is evident from the continuous addition in subscriber base in both domestic as well as international market. In the last quarter, the company added 8.3 million subscribers (highest in history), which helped Netflix’s Q4 revenues surge 32.6% year over year to hit nearly $3.3 billion.

International expansion is what the company is mostly benefiting from. Out of the total 117.58 million global subscribers, 62.83 million are from international quarters.

The content strength is further evident from the fact that despite a 10% subscription price increase in the United States and Europe, subscriber addition remained unaffected in the last quarter.

Netflix recently received an impetus by winning a second Oscar for the documentary Icarus. Moreover, the company is reportedly in talks with the former U.S. President Barrack Obama to produce exclusive shows for the platform. The ex-President featured in a TV talk show for the first time since he left office in the first episode of Netflix’s My Next Guest Needs No Introduction with David Letterman.

Notably, the company has a whopping budget of $7.5-$8 billion to be spent this year on original content. Such enormous spending can dent the company’s profitability in the near term but we believe that Netflix’s expanding international content portfolio will rapidly drive subscriber growth and will further boost the stock in the rest of 2018.

Netflix carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of the company have gained 131% in the past year, substantially outperforming the S&P 500’s 17.8% rally.



Amazon.com AMZN

Amazon has focused on building video content primarily for Prime subscribers.

Amazon Prime offers many additional benefits such as one-day delivery, music streaming and free e-Books with Prime membership, which gives the company an extra edge over others. The company announced that more paid members joined Prime in 2017 than any previous year — both worldwide and in the United States.

Last year, Amazon reportedly spent $4.5 billion on content. JPMorgan estimates the company to spend $5 billion this year. On the last conference call, management noted to keep up investment in this area given the rise in customer engagement that they are witnessing.

Notably, Amazon is working on improving its regional content portfolio. With the launch of original content like Breathe in India, the company recorded stupendous success. Reportedly, Amazon is also developing a TV series based on The Lord of the Rings novel.

Amazon carries a Zacks Rank #3. The stock has surged 84.8% in the past year, significantly outperforming the S&P 500’s 17.8% rally.




Apple AAPL

iPhone maker Apple is gearing up to become a major producer of original content. The company’s strategy to diversify into the streaming business is anticipated to combat the weaknesses stemming from sluggish iPhone sales.

Apple is likely to launch streaming service in 2018, which is expected to provide a significant boost to the Services business. Apple has also made key appointments to jump-start expansion into original television programming. The company is also developing series starring the Oscar-winning actors. Moreover, Apple has also shown interest for the distribution rights of the upcoming James Bond movie.

Notably, Apple is set to invest $1 billion on original television shows and movies in 2018 through Apple Music. Apple’s $1-billion investment will definitely improve its competitive position. However, in order to become a top original content producer, the company may need to increase spending in the long haul, which, given Apple’s strong balance sheet will not be a major concern.

Apple carries a Zacks Rank #3. Shares of Apple have moved up 29.3% in the past year, significantly outperforming the S&P 500’s 17.8% rally.



Facebook FB

The social networking giant is also not far from zeroing in on the promising video streaming market.

To achieve this, Facebook unveiled a tab called “Watch” in August 2017 that is exclusively dedicated to video viewing. Early this year, it also rolled out a new feature called “Watch Party” that enables group members to watch videos together and interact among themselves, thereby improving user engagement.

Although the company is yet to share any metrics on “Watch”, it is highly optimistic about its long-term benefits. Management believes Watch to drive the number of meaningful social interactions on the platform, which currently is the company’s main objective.

Notably, Facebook plans to invest $1 billion in original content in 2018. The company has hired executives to expand the roster of original content. Facebook recently signed a deal with Major League Baseball (MLB) to stream 25 games on Watch this season. Not just this, prestigious awards ceremonies like The Oscars: All Access and red carpet pre-show of Golden Globes are also streamed on the platform.

We believe by bringing more video content, Facebook is trying to bring in more ad dollars, which remain the mainstay of the company’s revenues with over 98% contribution in the last fiscal.

Facebook carries a Zacks Rank #2 (Buy). The company’s shares have gained 32.7% in the past year, significantly outperforming the S&P 500’s 17.8% rally.



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