Netflix Is the New Black
Netflix is an American subscription-based media distribution service that has transitioned successfully from the DVD rental business to a streaming video on demand model, currently standing as the largest streaming service by volume. The company showed strong second quarter results, driven primarily by substantial growth in its subscriber base, with revenues increasing 20% year-over-year. By May 2013, Netflix had reached over 29 million domestic streaming subscribers (up from 23.41 million a year ago) and 7.14 million international subscribers (up from 3.07 million).
Soaring almost 430% during the last 12 months, Netflix stock trades at $305 or 16.1 times its book value, a massive premium to the industry average. Is it a buy? Well, I’m not as convinced, and many influential investors appear to think alike: Jim Simons and value investor Tom Russo have recently sold their shares, while George Soros has reduced almost 40% of his own.
The firm has been continuously expanding its subscriber base thanks to competitive pricing and diversified content. Besides signing new licensing agreements with major content owners, the company has been offering original programming, which should distinguish it from other streaming content providers. Yet, Netflix´s appeal is directly conditioned by its ability to offer new and sought-after content to its subscribers, and this is a big challenge for a firm that faces continuous cost escalation from content owners.
In addition, Netflix has been aggressively expanding to the international market recently, and although there are major international opportunities for an industry-leading player like Netflix, its prospects outside the U.S. and Canadian markets still remain uncertain.
Going for Television
DreamWorks Animation is a world-renown animation studio that has produced a number of hit franchises in the last 15 years, including Shrek, Madagascar and Kung Fu Panda. Like Netflix, the firm has reported strong revenue and earnings results for the fiscal second quarter, in this case led by the box office success of “The Croods.” Up over 66% during this year, DreamWorks Animation trades at $29 or 1.8 times its book value, at 37% discount to the industry average. Murray Stahl, Horizon Kinetics' chief investment officer has been consistently adding more of this stock to his portfolio during the last months, so it would be smart to give it a closer look.
What about the firm? Although the film business is what provides most of the revenue and profit for the company, DreamWorks has been attempting to diversify paying attention to television and consumer products. Its recent licensing agreement with Netflix for 1.200 TV episodes showcasing some of the firm’s most famous characters is a good example of this, and it should add stable revenue source to the company.
The film industry may be a hit-or-miss business, but the firm certainly has a track record of producing hit franchises, which are monetized in multiple ways, and remains headed by the experienced Jeffrey Katzenberg. My take? DreamWorks looks strong despite increasing competition in the animation film industry and holds valuable portfolio of highly sought-after content.
Cinedigm Digital Cinema Corp. is a digital cinema leader that focuses on cinema servicing, film-business software and content distribution. The firm has one of the largest independent film content portfolios, and its proprietary software is the industry’s standard for film studios, theaters and theater chains alike, on business management.
Investors have been usually put off by the firm’s debt, taken to finance its digital cinema build-outs. Actually, big hedge fund managers who owned Cinedigm's stocks sold out years ago. But now it might be time to reconsider, as its balance sheet improves, growth opportunities for its software and content business multiply, and over 12.000 cinema screens provide consistent cash flow,. Currently, Cinedigm trades at $1.54 or 0.8 times its sales TTM, at 57% discount to the industry average.
The firm has recently signed an eight-figure deal with Netflix for a catalog of about 20,000 titles, including many of the independent productions in which Cinedigm specializes. While investors tend to fancy big Hollywood productions, low budget films actually offer the highest ROIC, and the company has been focusing in this market (typically films in the $100,000 to $1 million range) with a successful low-risk/high-return approach.
For the investor, my main concern beyond CIDM’s current liabilities is the further potential of share dilution. The company has already increased shares outstanding by over 11 million shares between fiscal 2012 and 2013 and issued another substantial amount last June.
The three companies briefly analyzed sure have important growth prospects ahead, although CIDM certainly looks riskier. If you’re thinking about long term, my bet here is on DreamWorks; its diversification strategy is more than interesting and its management holds a solid track record to back my confidence in its future.
Disclosure: Damian Illia holds no position in any stocks mentioned