4 things investors need to know about the packed streaming world

Published Tue, Mar 9 20211:18 PM ESTUpdated Tue, Mar 9 20212:56 PM EST

Key Points

Just because a company operates a streaming service doesn't mean that that platform is the most important aspect of its business or its highest revenue driver.
The type of content on a streaming service and the amount the company is planning to spend on that content is another indicator for investors about how a company values its streaming service.
Average revenue per user can be an indicator of the quality of revenue a company is generating and as a metric to see how a company is performing over time.

In January, "Bridgerton" smashed Netflix viewership records to become its biggest series ever, a feat that came barely a week after the company reported that it had topped 200 million subscribers globally. Hot on Netflix's heels is Disney, which topped 100 million subscribers Tuesday, just 16 months after its debut. But what does this mean for investors? Consumers are increasingly turning to streaming services, ditching traditional cable — and often commercials, too — for bingeable content they can watch on their TVs, tablets and phones. As the streaming space widens, and more players enter the fray — as Paramount+ did last week — investors have a lot to take into consideration. What differentiates one company or streaming service from another? How does a service generate revenue? How much money is a company spending on content? How many subscribers does it have and how much money is made from each user? The answers to these questions can go a long way to determining the value of a streaming service to a company and how much influence its performance has on a company's stock. Here are four things investors should know about the ongoing streaming war before scooping up shares: A piece of the pie vs. the whole Just because a company operates a streaming service doesn't mean that platform is the most important aspect of its business or its highest revenue driver. For example, a company like Netflix is exclusively a streaming company. Every part of its business is designed to bolster its service with content. Whereas, a company like AT & T is a media conglomerate that sells mobile and fixed telephone services, internet and home security. It also owns a studio and offers a streaming service. Let's look at Disney . The company operates multiple media networks, several film and television studios, theme parks, resorts and cruises, as well as a consumer products and publishing division. It has three streaming services: Hulu, ESPN+ and Disney+. Prior the coronavirus pandemic , Disney generated the majority of its revenue from its parks, experiences and products business. In fact, in 2019, this division represented more than a third of its total revenue, $26.2 billion. Direct-to-consumer, the catchall for Disney's streaming services, represented less than a fifth of its annual revenue. In 2020, with significant subscriber growth and the parks division taking a significant hit from the pandemic, direct-to-consumer represented around a fourth of Disney's revenue, nearly doubling to $16.9 billion. Disney's diversification helps shield it if one division takes a blow during a quarter. But it also means that its parts may not be rewarded by investors the same way a pure-play company might be. Disney is trading at around $195 per share, but it doesn't have the same valuation as Netflix, which currently tops $500 a share. This price represents 136.4 times Netflix's next 12-months of cash flow while Disney trades at 32.3 times its projected cash flow. So even though Disney has a market cap of $355 billion, much higher than that of Netflix's, which stands at just about $226 billion, it's not being fully rewarded for the potential of its streaming business, and that could give the stock room to grow. In February, following Disney's fiscal first-quarter earnings, Guggenheim Securities' Michael Morris boosted his target price by $25 to $225. He wrote that he valued the media giant's streaming business at around $137 per share, using a multiple that is "consistent with the current Netflix valuation." He valued its linear media business at $28 a share, based on its peer trading multiples, and valued its theme park and consumer products division at around $80 per share. A consensus of around 30 analysts have set an average target price for Disney at around $205 per share, according to data from FactSet. The lowest price target is listed as $147 per share and the highest being $230 per share. Of those analysts about 70% see Disney as a "buy." In the last three years, Disney's market cap has whipsawed between $150 billion and $350 billion. Disney's market cap sank early last year, after Bob Iger stepped down as CEO and pandemic shutdowns weighed on its movie and theme parks businesses. In October, Disney reorganized its business to place a higher emphasis on its streaming business , signaling to investors that its direct-to-consumer business will likely contribute more to the company's revenue over time, and its stock began to rise. Disney has committed to investing between $14 billion and $16 billion on content each year and has nearly quadrupled its subscriber estimate to a range of 230 million to 260 million by 2024. The type of content on a streaming service and the amount the company is planning to spend on that content is another indicator for investors about how a company values its streaming service. Disney has made its Disney+ service a destination for family-friendly favorites and the only place Marvel and Star Wars fans can see content that directly connects to blockbuster theatrical features. Exclusivity of hotly anticipated content is another thing investors should consider when looking at a stock. Ad-supported or subscriber-based And just as each company is structured differently, so too are the services themselves. Some are ad-supported, deriving some revenue from advertising costs, while others are strictly subscription based with a flat monthly fee allowing customers to access content. This means that some services rely solely on subscriber growth for revenue, while others derive revenue from a combination of new memberships and third-party advertisers. Using Disney's three services as an example, one sees Disney+ and ESPN+ operate on a subscriber-based model, while Hulu offers both ad-supported and ad-free options. Having ad-support means that Disney can shave $6 off Hulu's price for users willing to watch advertisements while using the service. This can entice budget-conscious consumers to join. Comcast -owned Peacock offers a free version of its service that has 20,000 hours of shows, movies and specials. Pay $4.99 and you get access to exclusive Peacock original series and live sports with ads. Pay $9.99, and you can skip the ads. On the flip side, streamers like Netflix opt to not provide any advertising and stick with a flat monthly or yearly fee to view content on its service. "They are two different lines of business," said media and streaming analyst Dan Rayburn. Ad-supported services have the added benefit of being able to target consumers with advertisements based on user data — what shows are they watching? How often are they watching? etc. However, these ad-supported services also tend to have less content available to viewers and the content is not always as good as what is available on a subscription-only streamer, Rayburn said. "We know that content is king," he said. "And AVODs don't have the greatest content. Compared to subscription services, it's not really close." Subscribers vs. sign-ups vs. activations In addition to looking at how a company generates its revenue, it's also important to glean how it reports subscriber growth. Some services report subscribers while others use terms like activations or sign-ups. A subscriber is someone who pays for a service while a "sign-up" is someone who signs up to use an ad-supported service for free, but doesn't pay a monthly fee. When it comes to ad-supported services, many companies will refer to subscribers as active monthly users, a way of reporting how many people used to app during a month. However, this number is often calculated by looking at how many people simply opened the app that month, making the metrics a bit fuzzier, Rayburn explained. Whereas a subscriber is someone who is actively paying the company each month. For example, Netflix reports subscribers and Peacock reports active monthly accounts. Activations, on the other hand, are a metric used by AT & T to describe customers who already pay for HBO and have opted to add HBO Max. Those that pay for HBO as a premium cable service are eligible to get the streaming service counterpart for free. The company also combines HBO and HBO Max subscribers into one number. It's important to know the distinction between these different terms in order to understand what a company is reporting. Simply turning HBO members into HBO Max members or getting someone to sign-up for a free service, where no additional money is generated, is different from adding a paying subscriber. A key metric to look at when comparing streamers is the average revenue per user, or ARPU. This tells investors how much money a company is making for each individual streamer. For Netflix, which has memberships plans that start $8.99 per month and go up to $17.99, the average revenue per user is $11.02, as of its most recent earnings report in January. Disney, for comparison, reported that its average monthly revenue per paid Disney+ subscriber is around $4.03. The company currently charges $6.99 per month, although that will rise to $7.99 at the end of March. ARPU can be an indicator of the quality of revenue a company is generating and as a metric to see how a company is performing over time. Viewership does not equal profit When it comes to viewership numbers, it's important to know that views are not equal to profit and each service has a different way of reporting how many people have watched a particular movie or TV show. "Viewership is all over the place, and nobody does it consistently or in the same manner," said Michael Pachter, analyst at Wedbush. Some will report the total number of subscribers that watched a particular piece of content. However, this number doesn't always mean that all of those subscribers actually finished watching something. Netflix, for example, counts a single view if a customer spends at least two minutes watching a film or series. And before you break out the calculator and try to crunch the numbers on how much a streamer would have made if people bought tickets to see it in theaters, there's one important thing to remember — streams aren't the same thing as tickets. Just because someone who has already paid for a service chooses to watch something, don't assume they would have paid to see it in theaters. "That's the problem with 'free' (part of a subscription, so no variable cost) or ad-supported views, since they have no real incremental cost to the viewer," Pachter said. He noted that it wouldn't make sense to make the same comparison to something like the Super Bowl. Just because one billion people watch the annual sporting event doesn't mean the telecast would generate $10 billion if every one who watched from home asked to pay $10. Another way streamers tout viewership is through the total number of hours or minutes viewed over the course of a period of time. This, too, doesn't give a full picture. You can't divide the total minutes viewed by the time of the movie to get an accurate count of how many people actually watched because you don't know if some subscribers watched it multiple times or if others stopped watching before it ended. Then there are streamers, like Disney, that don't provide any viewership data at all. Additionally, it's important to note that while companies like Nielsen provide streaming data, it's unclear how accurate the figures actually are if streamers don't corroborate the reports. In essence, all of these viewership metrics are used for marketing and should be considered in context. Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

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Hot on Netflix's heels is Disney, which topped 100 million subscribers Tuesday, just 16 months after its debut.

But what does this mean for investors?

Consumers are increasingly turning to streaming services, ditching traditional cable — and often commercials, too — for bingeable content they can watch on their TVs, tablets and phones. As the streaming space widens, and more players enter the fray — as Paramount+ did last week — investors have a lot to take into consideration.

What differentiates one company or streaming service from another? How does a service generate revenue? How much money is a company spending on content? How many subscribers does it have and how much money is made from each user?

The answers to these questions can go a long way to determining the value of a streaming service to a company and how much influence its performance has on a company's stock.

Here are four things investors should know about the ongoing streaming war before scooping up shares: