Streaming companies may have significant growth prospects due to the wider trends in the entertainment industry. As cord-cutting becomes more prevalent and the variety of content expands, this area deserves careful attention from strategic investors.
As most streaming stocks have declined over the past six months, with Netflix (NFLX, Financial) being an outlier, investors may be interested in potential value opportunities. Predominantly, the sector consists of traditional entertainment conglomerates grappling with maintaining content expenditure without drastically affecting their regular income streams.
In this evolving streaming landscape, not only the size of the content library matters, but also the ability to effectively monetize and innovate. Hence, understanding the industry's fast-paced evolution is crucial.
In addition, I used GuruFocus' All-in-One Screener to find diversified media stocks that are trading at a discount based on their historical price-sales ratio and are cheaper relative to other players in their industry.
Paramount
Entering the second half of the year, the roller-coaster ride Paramount Global (PARA, Financial) has been on has left some investors feeling dizzy. The entertainment behemoth's shares saw a 35% decline over the last six months.
The first-quarter earnings report painted a bleak picture, with revenue slightly dropping by 1% year over year to $7.26 billion. Moreover, net income plunged 358% to -$1.12 billion, resulting in a loss per share of $1.74. This downturn has understandably ruffled investors' confidence.
However, I need to dig deeper to understand this titan's potential.
Recent events indicate Paramount is adjusting its strategy and evaluating its assets. With advanced talks to sell its book publisher, Simon & Schuster, to KKR & Co. Inc. (KKR, Financial), the company seems to be turning its attention to the booming streaming sector.
Paramount has demonstrated its global appeal, achieving a 37% surge in streaming subscribers, bringing its total to over 77 million worldwide by the end of the fourth quarter of 2022. As per its latest earnings report, Paramount+ had a count of 60 million subscribers at the end of March, marking an increase of 4.1 million sequentially.
Moreover, Chief Financial Officer Naveen Chopra's announcement that the company is committed to delivering profitability in streaming by curbing content spending below the $6 billion target in 2024 hints at an imminent focus on improving the net profit margin.
Moving on to valuation, Paramount Global has seen a notable fluctuation in its price-sales ratio. The range has varied significantly over the past decade, with the lowest ratio being 0.27, the median at 1.48 and the highest multiple at 3.03. Further, the ratio currently stands at 0.34, considerably lower than the industry median of 1.26.
While Paramount's recent performance may appear shaky, the opportunity for a rebound is tangible. As the company transitions, it may be an undervalued opportunity for those willing to weather the storm for potential future gains.
Warner Bros. Discovery
If you are an adventurous investor hunting for cheap value stocks in the media landscape, the nearly -10% return on Warner Bros. Discovery Inc. (WBD, Financial) over the last six months could pique your interest. The stock experienced turbulent trading following a mixed earnings report, but the underlying transformation story hints at untapped potential.
While the earnings report presented a soft revenue scenario- a 5.4% overall rise to $10.36 billion - the robust cash flow picture is the silver lining. The company clocked an impressive $1.7 billion in free cash flow, almost double the initial estimates. This noteworthy leap, combined with proactive measures to curb costs and expenses by over 16%, helped the company reduce its debt by $1.6 billion.
This leaner, meaner financial health allows Warner Bros. Discovery to aggressively pursue growth in the competitive streaming market. Despite a recent dip in subscribers, the company's commitment to investing in direct-to-consumer video shows a long-term perspective on value creation.
After its latest earnings report, the company appears to be maintaining its course of solid revenue growth, spurred primarily by the success of its latest film release, "Barbie," which has created a substantial wave at the box office.
The company's commitment to diversifying its content portfolio and bolstering its presence in the global entertainment market has seen it go beyond the traditional boundaries of film and television. The excitement around the firm underscores Warner Bros. Discovery's ability to take calculated risks and win big.
Let's now shift our focus to the subject of valuation. Warner Bros. Discovery's price-sales ratio is 0.78, which reflects a cheaper valuation than the historical median of 2.17. It also places its valuation more favorably than approximately 66.44% of the 1,016 companies operating within the media - diversified industry. The industry median is 1.26.
While the stock may seem to languish today, the underlying narrative indicates a steadfast approach to value and a promising strategy for future growth in the streaming industry. The Warner Bros. Discovery story is evolving, with exciting chapters yet to be written. It is a value stock for those with a keen eye on the future of entertainment to keep on their radars.
