3 Cheap Stocks to Watch in the Fight Over Sports Streaming

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Adding subscribers at all costs no longer satisfies many investors. Wall Street wants streamers to produce profits. Companies are cutting costs, bundling services, and competing for live sports to generate more revenue. Morningstar’s media and telecommunications team has taken an in-depth look at the streaming industry. Matthew Dolgin is a senior equity analyst for Morningstar Research Services.

Welcome to the podcast, Matt.

Matthew Dolgin: Thanks, Ivanna.

Netflix’s Dominance

Hampton: Netflix’s dominance extends beyond streaming. Your team’s research highlighted that Netflix likely now reaches more US homes than traditional TV. Matt, how did we get here?

Dolgin: Well, it seems like it happened slowly and then all at once. There were two sides to this. Netflix coming up from what had been, of course, at the beginning a small subscriber base and the pay-TV subscribers or services losing subscribers at a rapid clip. So, from the Netflix point of view, it started out probably more of like as a niche product. It didn’t have necessarily premier content. It wasn’t huge, but it had some features that were attractive for consumers. It was a low monthly price. There was a lot of different content. It could be consumed anywhere. So that was able to kind of build. And we know what happened in Netflix. It became huge. It started getting premier type of content, and it is the behemoth of the streaming platforms now.

From the pay-TV point of view—and part of this is because of Netflix, but not all—the traditional media companies probably didn’t initially take Netflix and its offering as a huge threat. But as it grew, they saw how big maybe it would be, and they also started creating, most of them, their own streaming platforms. So, we started getting a lot more content in a lot more different places, and a lot of it wasn’t necessarily exclusive to the pay-TV bundle anymore. Couple that with both and probably initially the younger generation, but as it went on, all generations becoming more comfortable with consuming information, entertainment outside of television, and you had people seeing that the price for a pay-TV subscription, which by the way has kept rising and rising while the value might become less and less, wasn’t necessarily worth it. They weren’t getting the value for it. So, we’ve seen the pay-TV subscriber base in the country drop by, I’d say, over 30% in the last decade-plus, whereas Netflix grows and all of a sudden, you’ve got Netflix at about the same number of subscribers.

Disney, Fox, and Warner Bros. Discovery’s New Sports-Focused Streaming Service

Hampton: The streaming wars ended. A truce followed. Matt, are we in a time of alliances? I mean, you got Disney, Fox, and Warner Bros. Discovery teaming up for a sports-focused streaming service.

Dolgin: Yeah, we think that alliances are both coming to a greater extent and also really necessary for this industry, especially for the traditional media firms. So, at this point, it’s pretty much been each of these companies out on their own with their streaming platform. Again, we’ve seen that change a little bit in the last few years. But that hasn’t worked out great for very many of them. And we end up with an environment again, where there are so many different platforms and content is all over the place. And it’s a little bit of an overload for a consumer. They for the most part aren’t subscribing to all, all at once. And that doesn’t work as well. And we think the best value for both consumers and ultimately also for certainly the traditional media companies that relied very much on pay television is for more of a bundled-type product. And so, I think we will see more alliances. And as you mentioned, the sports joint venture, which is going to be the joint streaming platform with Fox, Warner Bros. Discovery, and Disney is a step in that direction. And we expect we’ll see more, if not in that exact same type of structure, more alliances to get content to consumers.

Hampton: It does get hard when you’re trying to figure out—where is the game?

Dolgin: Yeah, that’s the other thing is that it’s—I don’t know if “clunkier” is the word—but it’s clunkier. It’s not as easy as just flipping from one channel to the next. And that’s another thing in addition to giving consumers the ability to have access to more content, it might make the experience more seamless for them and make them happier in that respect also.

How Companies Can Expand Into Streaming

Hampton: How can companies that financially depend on cable and satellite balance expanding into streaming?

Dolgin: It’s not easy. And that’s why we’ve seen so many of these companies struggle. And to this point, it seems like they haven’t necessarily looked at those things together, at least outwardly. They focus very much on their streaming business. In the past, it wasn’t necessarily how much profits they would generate, but it was more about getting those subscribers and building up to bigger platforms. Now they’ve been more profit-oriented as far as their focus, but they seem to be looking at streaming in some respects separately from pay TV, their pay-TV subscribers through the cable companies, and kind of just letting the chips fall where they may there.

Again, that hasn’t quite worked. We think they’re seeing that that isn’t working. We’ve seen steps in bringing those two things together. In the fall, Disney made an agreement with Charter, which is one of the country’s biggest cable companies, that will allow Disney+ access to Charter subscribers, so the traditional pay-TV subscribers will now get that streaming access. And we think that’s really the key—to answer your question, how do you balance it and manage this—is rather than acknowledge or accept that traditional pay TV is going away and it’s all going to streaming and now that’s where our focus is, maybe just evolve the pay-TV bundle and make that more attractive and bring some streaming type services into it, because as I mentioned before, the value has been there less and less for that traditional subscription, but if you can increase value, we think for these companies, it ends up being the best path forward, really, for their financial situations.

The Role of Sports in Streaming

Hampton: 2025 looks like it’s going to be a big year for streaming. WWE Raw set to debut on Netflix. Disney is expected to launch a stand-alone ESPN app. Talk about the role sports are going to play in the next era.

Dolgin: Well, in the next era, sports are going to be really important just like they’ve been in the prior era. For many of the traditional media companies, sports have been, well, when they’re part of the bundle, really important because it gives them power over the pay-TV distributors, who are the cable companies. We’ve seen in the past with things like blackouts, where certain companies’ networks won’t be available, they don’t last long because when they’ve got premier content—and sports is really at the top of the list—that doesn’t last and eventually it has to get back on those platforms. So, sports has been critical for that.

When we are in more of a streaming environment, it ends up in many cases being the same. If you want to watch a subset of football games or NBA or whatever, the streaming service that has that programming is no longer optional or something you’re considering. That becomes a must-have for you. And so, sports has been and should remain critical to drawing viewers. Now, whether, as pricing for sports—the cost of sports has risen so much—whether that ends up being worth it for these companies is another question, but it is critical, and it seems like—and I’m always aware of the potential winner’s curse—but it seems like it remains critical for them, and it’s very important to them that they continue to get it to draw consumers to their platforms or to keep them in the bundle.

NBA TV Deal

Hampton: I’m glad you brought up the cost of sports because we’re going to talk about the upcoming NBA TV deal. It looks like it’s going to be a big fight. What kind of competition do you expect, and does winning matter?

Dolgin: As far as winning matters, it goes right back to what I just said about the winner’s curse. Yes, winning does matter, but the caveat is: How much does it cost to win? Because, especially with these companies paying more attention to the bottom line lately and it no longer flying if they’re burning a lot of cash in their streaming services or for these companies that rely mostly on traditional media, they’ve struggled as consolidated companies, that could be problematic.

As far as what to expect from the negotiations—so right now, ESPN and Turner, which is owned by Warner Bros. Discovery, are the incumbents with the NBA rights. They’ve been in an exclusive negotiating window. We think the most likely outcome is that they retain the bulk of the rights. We think it’s important to them, especially Turner. It’s the premier content for Turner Sports, which doesn’t have football, or certainly not NFL football.

The question is, to what extent do some of these newer media companies or the traditional tech companies, Amazon, Apple, and Netflix, too, to what extent do they want to get in on this bidding? We don’t think that they will be the primary winners, meaning we don’t think they’ll have the bulk of games, but they might get some like we’ve seen in football with Amazon getting Thursday Night Football. Netflix, of course, there’s the rumbling of whether they’ll get into more sports. So, we don’t think that they will be the big winners securing the bulk of the rights, but they may have a place there.

Why Are Apple and Amazon Tough Competitors?

Hampton: Now your team’s research emphasized that not all companies view streaming the same. You mentioned the tech companies, Apple’s and Amazon’s goals typically differ from their rivals. Talk about why that makes them tough competitors.

Dolgin: Well, the biggest reason is because they don’t rely on these businesses, and the media business has been tough. Those companies generate huge amounts of free cash flow. They have great balance sheets, which means that they’ve got the ability to take chances, to spend on content, see what works. And if it doesn’t, that’s OK, it was worth it. And on top of that, they don’t necessarily need to rely on sports to be the big profit-drivers for their companies—or media in general—to be the big profit-drivers in their companies, whereas the media firms do. So, if they can even—and again, we don’t even know that they feel it’s necessary to make money in media or in sports, because maybe they see the bigger picture and think it helps drive the rest of the business—but even apart from that, if they could even break in, even for them, maybe that’s good enough because the rest of the business can pick up the slack and help them be successful. Whereas most of the traditional media firms, and then of course, Netflix included with these, they rely on media and/or television video content to drive their businesses to a great extent or exclusively. And so, they need this to be great businesses. And when you’re competing against someone who doesn’t, that can make it tougher.

Streaming Services With Compelling Growth Stories

Hampton: Indeed. Which streamers are telling the most compelling growth stories to convince investors to stick around for the next five years?

Dolgin: We think Netflix is the clear leader among the streaming companies. Now, that doesn’t necessarily mean that we think that its stock is the best buy because we think the market recognizes it. But Netflix has big advantages over others. It also doesn’t have the traditional declining television business to contend with. So, it can continue plowing more money into creating content, making great user experiences. We think that subscribers are already kind of attached to Netflix. And so, it would take something for them to leave as opposed to the others. We think that subscribers may be in and out a little bit more. So, Netflix seems to be the clear leader.

As far as the traditional media companies, we think they’re in similar boats. Disney has more scale, but each of them is balancing making these businesses more profitable—or profitable at all because they had not been—while continuing to add subscribers, which requires spending on content. And so, we think each of these businesses get better. And we think part of that is because what we were talking about earlier, the need to bundle and kind of change the way they’ve gone about it. But I can’t say that any of the traditional media companies with streaming services, and I’m thinking mostly about Disney and Warner Bros. Discovery and Paramount, is a clear leader on the others nor is much better suited. Although as soon as I say that, if I had to pick one streaming services of the three, it would be Disney. They’ve got scale, and they’ve got some unique Disney content that probably gives them a leg up.

Streaming Company Stock Picks

Hampton: Well, name the companies that top your favorites list.

Dolgin: Our sector director, Mike Hodel, covers Comcast, and that would probably be the one. Comcast owns NBC Universal. And it’s actually not because of NBC Universal that he thinks Comcast is so undervalued right now. It’s more of their broadband business. If we are talking more about valuation or those driven by traditional media, to us, it’s Warner Bros. Discovery and Paramount, and I’d probably go more toward Warner Bros. Discovery. Those companies have struggled. In some ways, they have an uphill climb still, but they have really good assets, and they’re being priced like they’re never going to figure it out. And we don’t think that’s the case. Certainly, the environment of the last several years was not a viable long-term solution, but we don’t think they’re going to attempt that solution forever. And some of the things we’ve talked about today as far as bundling and integrating with potentially pay TV and then, not to mention they’ve got still big movie and television studios, there is value there, and it’s being hidden right now. So, if we had to pick stocks, it would probably be those.

Hampton: Matt, thank you for coming to the table, and thanks for your insights today.

Dolgin: Thanks for having me, Ivanna.

Hampton: That wraps up Investing Insights this week. Check out the Q2 2024 edition of Morningstar magazine for more insights into the streaming industry. Subscribe to Morningstar’s YouTube channel to stay up to date on investment ideas and market trends. I want to thank Senior Video Producer Jake Vankersen and Associate Multimedia Editor Jessica Bebel. Thanks to all of you for checking out the podcast. We appreciate it. I’m Ivanna Hampton, a lead multimedia editor at Morningstar. Take care.