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Education Series: Single-Stock ETPs

Streaming ETPs: Which Measures Matter?

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Industry watchers would proclaim that TV is dead. The way forward is “streaming” – wherein content is made available on demand for the viewer to consume at a time of their choosing. Once considered impossible due to the limited telecommunication bandwidth of a copper telephone cable, technology has made it not just possible but preferable since it’s no longer dependent on a bulky (and expensive) television set.

Top broadcasting companies have been rising to the challenge from upstart technology companies specializing in streaming. This article will dig into the metrics defining performance in this space and present an outlook on three prominent players – Disney (ticker: DIS), Netflix (ticker: NFLX) and Roku (ticker: ROKU).

 

Landscape and Value Propositions

The video streaming market has been growing in tandem with the availability of high speed internet connectivity. With this as a factor for growth, it was North America that predictably has the edge in total number of consumers. However, the Asia-Pacific region is the region that is slated to grow the fastest over the next few years.

A factor that ensures success is the variety of content made available. So, a brief overview of the three companies and their respective value propositions would be in order.

Netflix started out as a humble rental DVD mail order service, competing against the now-defunct Blockbuster video rental store network It went into the streaming space with a launch in Canada in 2010, before branching into the US the next year. Over the years, the streaming segment went on to become its top revenue earner while the DVD rental segment dwindled away into virtual insignificance.

As of February 2021, Netflix had at least 15,000 titles (i.e. movies and TV shows) across all its international libraries. This number has been declining as the company has been building out its original content library in favour of sharing revenue with the title provider. North America remains its main source of revenue with Europe, Middle East and Africa (EMEA) a close second.

Starting out in 2008 as a Netflix project to develop a player, Roku went on to become a company in its right with its “Roku box”: a small square device for the TV that connects to the internet and allows the user can watch free and paid video content via apps (also called “Channels”). The company operates two main business segments:

  1. The “Platform” segment, which generates revenue from digital advertising and related services, content distribution, premium subscriptions for customers wanting ad-free content, and licensing arrangements with the likes of TV brands;

  2. The “Player” segment, which generates revenues from the sale of streaming players, audio products, and related accessories.

In terms of revenues, the “Platform” segment has become increasingly more important and profitable for Roku. For example, 98% of the company’s Gross Profit in Q4 2020 came from this segment.

Disney is, by far, the most senior of the three. With nearly 90 years in the entertainment industry, “The Mouse” is a behemoth that operates everything from amusement parks and cruise lines to entire TV channels. It also owns Marvel’s entire catalogue, the Star Wars Universe, streaming service major Hulu, and recently-launched Disney+ – which makes available the entirety of its home-grown catalogue of virtually tens of thousands of movies and TV shows. Starting in Q1 FY 2021, Disney reorganized its reportable business segments. The company now operates through two main business segments: Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP).

While DPEP is comprised of theme parks and resorts in Florida, California, Hawaii, Paris, Hong Kong, and Shanghai and also includes a cruise line and vacation club, DMED is further broken down to:

  1. “DMED: Linear Networks”, which operates cable networks such as Disney, ESPN, and National Geographic; the ABC broadcast television network and eight domestic television stations; as well as the company’s 50% equity investment in A+E Television Networks.

  2. “DMED: Direct-to-Consumer”, which is comprised of its various streaming services, including: Disney+; Disney+Hotstar; ESPN+; Hulu; and Star+.

  3. “DMED: Content Sales/Licensing and Other”, which sells film and television content to third-party TV and subscription video-on-demand services.

DMED’s third segment is a rising concern for the likes of Netflix and Roku. Increasingly, more and more content developers (such as Disney, CBS and NBC) have been “going their own way”, i.e. building out their own streaming services. This explains Netflix’s increasing push to develop its own content. Roku, too, announced the launch of its own original programming in May, which will initially become available to viewers in the U.S., U.K. and Canada through its free streaming hub, The Roku Channel. The initial set of 30 titles was acquired from the now-defunct Quibi streaming service, with more original content slated to debut over the next year.

 

Metrics of Meaning

There is a substantial disparity in comparing the entirety of Disney versus the other two: the former’s non-streaming properties are much larger than its streaming segment. Plus, the former took a massive hit during the pandemic-induced restrictions.

Doing a side-by-side comparison of operating income gives very skewed results.

Furthermore, with respect to Disney, a closer look at the financial statements for the first six months of 2020 versus 2021 reveal another characteristic of the company’s streaming division.

While revenues collected by the streaming services were higher, the operating income has, in fact, been negative (albeit less so than the previous year) – thus making the streaming division a loss-maker. The true profit leader has been its traditional TV networks, despite the marginal fall in revenue.

The business of streaming is quite like the e-commerce conundrum discussed earlier: it takes a lot of capital to get a profitable business up and running. Netflix had worked out its teething issues earlier; Disney’s streaming division is still working out the kinks.

A metric used by industry watchers is “Average Revenue Per User” (ARPU). A non-GAAP measure, this metric allows management as well as investors to refine their analysis of a company’s revenue generation capability and growth at the per-customer level.

Over the past year, Disney+’s ARPU has fallen by 28%.

Netflix, on the other hand, has shown a steady increase across all regions with a corresponding rise in worldwide ARPU.

Roku, however, has been skyrocketing in this metric.

Roku’s ARPU for Q1 2021 was $32.14, up 32% YoY. In Q1 2019, ARPU was $19.06, a 27% YoY gain. For Q1 2020, it was $24.35, which was a 28% increase. And now with original content slated for release, this metric is only expected to increase – either by drawing in new subscribers or by increasing the amount of time that subscribers will stay tuned in.

 

In Conclusion

Given what we have learned about the companies and the most meaningful metric in the streaming business, the year to date (YTD) stock performance comparison of these 3 companies versus the benchmark S&P 500 (SPX) should come as no surprise.

Investors must bear in mind, however, that comparing Disney versus streaming companies is a little unfair. While the company’s streaming division is slated to grow in strides in the future, it is neither at full potential currently nor is it a major component of the behemoth that is “The Mouse”. In a similar vein, another contender frequently stated as serious competition in the subscription-based streaming market is Amazon Prime. Currently, upon purchasing Prime membership, the purchaser gains access to exclusive shopping discounts and other related value savers; access to content is an additional benefit. Thus, determining the value of Amazon’s streaming business as a standalone becomes rather difficult.

Netflix’s flagging stock performance lies in its non-reliance on a television set as well as the quality of its content vis-à-vis the cost of producing the same. The company is now offering online gaming at no additional cost to its subscribers, which will likely make a huge difference in the future (we have, in fact, covered the gaming market in a previous article). Meanwhile, Roku’s performance lies in its ability to bring eyeballs to content hosted on its service and the inherent advertising potential therein. The content it produces on its own could very well be the cherry on top. However, at this point, your guess is as good as ours.

References:

  1. Video Streaming Market Research Report, Prescient & Strategic Intelligence/li>
  2. Roku Stock’s Magic Metric: Average Revenue Per User, InvestorPlace
  3. What’s The Revenue Potential For Disney Plus?, Trefis

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