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Streaming Wars: Which Video Streaming Stocks To Own?

Video streaming is growing fast, but we think only a handful of companies will remain most dominant. Today, we discuss which stocks to own in this space.

The video streaming sector has grown strongly over the past years, mainly driven by the adoption of online entertainment and the “cord-cutting” phenomenon. With huge addressable market and compelling growth prospects, even the more traditional media companies have dipped their toes in this space.

But which companies stand out and should dominate video streaming in the coming years? And what stocks should investors own to ride the potential upside in the industry? We, at MavenFlix, have our opinions and we will discuss the arguments below.

Figure 1: A person choosing content in the Netflix app on the iPad.

Figure 1: A person choosing content in the Netflix app on the iPad.

(Read more from MavenFlix: Buy Spotify Stock At Pre-Q3 Earnings Levels?)

Sector overview

The OTT (over the top) market has a 2025 TAM (total addressable market) projected at nearly 130% higher than 2019. The respectable 12%-plus CAGR underscores the attention-grabbing growth potential for the sector over the next 5 years at least.

Figure 2: OTT total addressable market projection.

Figure 2: OTT total addressable market projection.

Most media companies, new or legacy, have positioned themselves to take advantage of this growth opportunity. This is certainly the case of Netflix, Disney and Amazon.

Currently, Netflix  (NFLX) - Get Free Report is ​​the industry leader, having twice the market share of Disney’s  (DIS) - Get Free Report Disney+ service, the third most watched in the US. However, Hulu has become one of Disney's recent yet most relevant acquisitions, shining the spotlight on the Burbank, California-based media giant. It is also worth noting that Disney+ launched as recently as 2019, so the 15% market share here is still impressive.

Among the top 3 companies, only Netflix is ​​exclusively dedicated to the streaming service (after having been primarily a DVD mail-in service for a while, a decade or two ago). Amazon  (AMZN) - Get Free Report, at the other end of the spectrum, has a very different business model. One could argue that Prime Video is merely a means to an end: to attract consumers to the Prime ecosystem, which in turn supports Amazon’s e-commerce efforts.

Figure 3: US video streaming market share (Q2 2021).

Figure 3: US video streaming market share (Q2 2021).

Valuation: are streaming companies expensive?

When thinking of technology companies and stocks, many already assume high valuation multiples. However, this is not always the case. The likes of Disney and Amazon have a diversified business model that transcends video streaming, which is why these companies have very different multiples.

Disney, for example, is trading at the smallest forward P/E of 27 times. Meanwhile, Amazon has the largest premium relative to peers, at about 2.5 times Disney’s earnings multiple.

Figure 4: DIS, AMZN and NFLX price-to-earnings.

Figure 4: DIS, AMZN and NFLX price-to-earnings.

Maybe counterintuitively to some, the companies with the highest multiples among the three above performed best in 2021. Netflix stock, in fact, beat the returns of the S&P 500. But because past performance is not an indication of future results, many understandably believe that NFLX is ​​expensive now, following the uptrend of the past year.

For investors who prefer to invest in better value stocks that are still exposed to the streaming segment, one natural choice would be DIS. Shares accumulate double-digit losses in 2021, which could mean a good margin of safety and the potential to ride an eventual rebound rally.

Figure 5: AMZN, DIS and NFLX year-to-date returns.

Figure 5: AMZN, DIS and NFLX year-to-date returns.

(Read more from MavenFlix: Roku Stock: Jim Cramer Wants to Sell It. Here’s Why)

Our take

The streaming segment should continue to grow in the coming years. While many tech and media companies will likely continue to invest in this space, we believe that only a few companies will come out clear winners and concentrate the greatest number of subscribers.

In our view, any of the three companies listed above will likely continue to dominate the video streaming market. Netflix has the brand recognition; Disney has the legacy content; and Amazon has the deep pockets to be the most relevant in the space.

Knowing which stock to invest in will depend quite a bit on each investor’s preferences: e.g. richly valued vs. cheaper, or diversified vs. pure-play.

(Read more from MavenFlix: Netflix Stock: A New Metric For Investors To Track)

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)