Media Companies Are Cracking the Streaming Code. Should Investors Care?

The streaming wars are over, and media stocks are starting to show it.

After years of struggling to churn a profit, media behemoths are reaping returns from their investments in streaming services following a viewership shift away from linear networks like cable, resulting in media ETFs outperforming of late. Analysts now recommend buying Disney’s stock as the company rallies from live sports and a booming ad market after nearly a decade of losses. While options for ETFs in the media and entertainment space are limited, the success of streaming — and of media companies more broadly — can be a sign of broader economic growth, experts said. This means, however, that some companies’ tentative success is subject to change.

“Most of the legacy media companies can survive,” said Matthew Dolgin, Morningstar’s senior equity analyst covering media and telecommunications. “I think the worst of the pain for the biggest legacy media names is in the past, but smaller companies that rely mostly on linear networks will be challenged.”

Profitability Plot Twist

Streaming began to overtake cable as the main way people get their film and TV fix about a decade ago, but it struggled to generate profits even for media behemoths. In 2022, the high up-front costs of launching a streaming service caused the big players — Paramount, Comcast, Disney and Warner Bros. Discovery — to lose about $10 billion on streaming. Even Netflix, arguably the winner of the streaming wars, took a major hit, its stock plummeting more than 40%, in part due to the artificial COVID-19 bump of 2020 when TV-watchers were more inclined to binge from home. Now, however — due to raised subscription costs, password crackdowns, layoffs, live-streaming replacing scripted content and increased ad revenue — streaming has begun to be profitable. Dolgin said that will only continue as consolidation drives the grouping together of services and as the landscape becomes less fragmented. “I anticipate the television subscription and viewing experience for consumers looking … like it’s been with pay TV, meaning subscriptions and experiences will be bundled,” he said.

Some ETFs with exposure to entertainment sector giants include:

• Invesco’s Dynamic Leisure and Entertainment ETF (PEJ), which is up 14.45% year-to-date.
• Pacer Bluestar Digital Entertainment ETF (ODDS), which is up 34% year-to-date.

Back to the (Streaming) Future. The bigger question for investors now, Dolgin said, is long-term viability. Success boils down to two factors — content relevance in a streaming-first world, and how effectively streaming revenues offset cable TV losses. For investors, intra-sector diversification isn’t much of a solution, he added, since it’s no secret that streaming is the future — not legacy networks. “One could pile into Netflix to have no exposure to legacy linear networks … but Netflix is more than priced for perfection already, and this will not be a winner-takes-all industry,” Dolgin added.