2 Media Stocks to Avoid, 1 to Buy
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Given how unpredictable consumers are in media, choosing whether to invest in Sirius, Pandora, and/or Netflix largely comes down to a personal hunch. Fundamentals in the past have no bearing on those in the future. While competition may limit growth opportunities, media consumers have had a propensity towards getting hooked on faddish offerings (*cough* Facebook) notwithstanding the diversity of choices, even better choices, elsewhere. Accordingly, I recommend investing in the media sector with humble but optimistic expectations.
For some time now, many bears have argued that Sirius faces an inevitable onslaught of competition from firms like Pandora. In my view, however, the firm has carved out a niche market in satellite radio and represents an attractive growth play on everything else. Whereas Pandora would struggle to expand into Sirius's turf, the reverse is most likely not true. With such a premium brand, Sirius can not only attract top talent but can also expand into uncertain segments.
It should not be surprising then that Sirius has seen excellent subscriber growth. 6,000 dealers in the US have signed onto the company's plan to offer free 3-month subscriptions. I am also optimistic about the company's expressed interest in offering on-demand radio for Android devices, which exposes the company to a rapidly growing smartphone market.
All in all, free cash flow has been strong enough for management to successfully pay off net debt and thereby decrease the cost of future interest payments. At this point, it is so strong that many shareholders are wondering what management will do with all of it. Many have speculated the Sirius will start buying back shares to the tune of nearly $3 billion by 2013. And while shares have started to dip from speculation over Liberty Media buying a controlling stake, for now, the company is on an upward trajectory.
Pandora ultimately has more headwinds given how ephemeral its business currently is. While I love going to pandora.com, I fully expect to be going to a new music "jukebox" in a year from now. Apple, for example, is seeking to expand into the Internet radio market, and it already has a strong start with iTunes. If Apple joins, it will open a Pandora's box of problems for… you guessed it… Pandora.
Netflix (NASDAQ: NFLX): Still Overvalued After Sell-off
The DVD-to-streaming business has been through several ups and downs. This is mostly just a haphazard attempt by the market to "size up" the company based on its uncertain future. In my view, while the company has gotten a bad rap for trying to exclusively penetrate streaming, it is still overvalued given financial difficulties and competition.
Complain as much as you want about poor customer relations, the truth is that Netflix still offers by far the most compelling DVD plan. Although this will come under competition from Amazon, Netflix still maintains the brand and ideal partnerships with content aggregators. It has leveraged this core strength to make itself known as primarily a provider of media streaming. The problem is that although CEO Reed Hastings may have been genuine when he said that he went ahead and accepted the short-term repercussions under a vision for the future, Netflix has been on a seeming death spiral ever since. Poor sales returns demand compensating promotional opportunities, which further cut into the company's ability to expand.
In addition, the attention has now zeroed in to how competitive the streaming market is. Aside from Hulu, there's pirating. In my view, Netflix's business ends where a Google search begins. Regrettably, the same thing is true for Pandora and yet Pandora is able to trade at high multiples with less scorn from market commentators. Accordingly, Netflix may be overvalued, but it is in good company.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.