3 Well-Positioned Stocks in the Entertainment Sector

Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

How we watch movies and TV shows has drastically changed over the past few years. In addition to traditional cable TV operators, several other options exist today. Let's look at three companies leading different sectors in the entertainment industry. Netflix (NASDAQ: NFLX), Comcast (NASDAQ: CMCSK) and TiVo (NASDAQ: TIVO) all provide different services but considerable upside for investors looking to buy and hold.

In constant growth

Trading at 526 times its earnings, Netflix is seen by many as an overvalued stock; but it is not. Constantly expanding its content and client base, this well-known Internet giant now reaches about 29 million households in the U.S., or one out of four. Not only should this company continue to penetrate various markets as the Internet-using population grows, but it could also increase revenue though raising prices. Even in the worst of cases, if people responded terribly to $2 to $4 upcharges in subscription fees, the firm could still acheive huge profit gains, reaching about a $10-$20 increase (or over 2000%) in earnings per share. Given its profit potential, I’d say that this company is a buy, especially as consensus estimates expect 19.5% growth per year over the next five years, compared to the industry’s 16.6% average. Here are some other reasons to believe that Netflix will outperform its peers in the long-run:

  • Its U.S. subscriber base is constantly expanding. Over the past year, domestic streaming subscriptions surged by almost 25%. The company is constantly improving content, and international expansion should drive growth in the upcoming years as streaming services start to displace traditional multimedia-content providers.

  • In particular, overseas markets have been contributing outstanding results. Last quarter, the company reported a 133% upsurge in the number of users. This trend is expected to continue as the company extends its international presence and product portfolio, especially by adding original content. Not only should its original series attract new users, but also help retain existing users.

  • The company's incursion into the fast-growing mobile and tablet segment has proven pretty successful and will most likely boost its subscriptions (its main income source) going forward.

  • Last quarter results portray an even more encouraging outlook for stockholders. Non-GAAP earnings reached $0.31 per share, 13 cents above the Zacks Consensus Estimate and up from an 8-cent loss in the year-ago quarter. This increase was accomplished on the back of a 17.7% upsurge in revenue due to augmented subscriptions.

A stock to watch

Comcast is yet another multimedia-content provider. Although lately the firm’s earnings have been flat in relation to consensus estimates, year-over-year growth was in fact strong, making the company deserve a closer look. While many analysts are concerned about the fundamentals and valuation of the Class A Stock for Comcast (NASDAQ: CMCSA), I would recommend paying further attention to its Special Class A stock, which actually stands as a buy in my view. Trading at 17.3 times earnings, it is cheaper than the Class A shares and exchanges below the industry's 23.3 price-to-earnings average (Morningstar), thus providing an attractive entry point for investors. Analyst consensus expects 18% growth per year over the upcoming five, which stands 8% ahead of the industry average and almost doubles that projected figures for S&P500 companies.

Additional reasons to believe that Comcast will deliver above average long-term growth:

  • Its (unmatched) multiple product offerings, which create plenty of growth opportunities, as most of its customers subscribe to more than one of the firm´s services. This generates not only high customer loyalty, but also higher cash flow levels per user.

  • Its scale; like Netflix, Comcast serves about 25% of pay-TV households in the U.S.

  • The acquisition of NBC Universal further widens its product portfolio by adding original productions, sports, and even theme parks.

  • The offering of several innovative products, including the firm’s set-top box, Xfinity TV – an on-demand service that provides access to both video programming and Internet – and its X1 services, among others. These should boost earnings in the upcoming quarters.

  • Strategic partnerships with major companies like Microsoft and Skype should further increase Comcast’s market share, which has already been growing on the back of an increased focus on both residential and small and medium business (SMB) clients. This last segment in particular offers plenty of development opportunities; given the firm’s low penetration, the SMB segment is expected to offer $20 to $30 billion in profit upside.

A stock with strong recognition

Finally there’s TiVo, known for offering the first commercially available digital video recorder. Before video streaming exploded, TiVo offered a unique product, but with the advance of technology, is this company still poised to grow? I’d say it is. I’d say, buy. Here are the reasons that lead me to believe the firm will outperform its peers in the long-run:

  • In the U.S., TiVo has been a synonym for digital recording of TV for quite some time now. Its strong brand recognition provides it with a considerable advantage to benefit from the growing demand in digital video recording devices, already present in about half of the country’s households.

  • Although the new subscription rates are bound to decelerate over the upcoming years in the U.S., several partnerships offer plenty of growth opportunities for TiVo in international markets. Some of the main alliances include companies like Comcast, Conax, Technicolor, Gemstar, Com Hem (Sweden), Cablevision (Mexico), Seven Network Limited (Australia), ONO (Spain), Virgin Media (U.K.) and Canal Digital (Scandinavia).

  • Several legal settlements concerning patent rights have relieved some pressure from TiVo, permitting it to freely use the technology, while providing new and recurring revenue sources. The company is estimated to earn significant licensing revenues from settlements with DISH & EchoStar ($500 million over calendar years 2012-2017), AT&T ($215 million through 2018) and Verizon ($100 million upfront and $150.4 million through 2018). Further litigations with Motorola and Cisco could result in another $8-to-$15-per-share gains.(Zacks)

  • Analyst consensus projects an outstanding growth rate for the company over the next five years. Calculations indicate 35.6% expected annual growth, compared to the 16.64% industry average.

Bottom line

As home entertainment options multiply, some companies lead the bunch offering unique products in a highly competitive arena. Although all three of the above-described companies offer plenty of upside for the long term, opinions about the shorter term are divided. While some would believe that Netflix is currently the strongest option, I would go for Comcast, which combines very attractive long- and short-term prospects.

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

Victor Selva has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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