Netflix (NASDAQ: NFLX) is already up nearly 117% year-to-date, but a few other names in this sector have been on a tear this year as well.
BK Asset Management’s Boris Schlossberg says that these stocks have benefitted from the surge in popularity of subscription services in the media space.
“They are essentially trading on the fact that they are growing their subscriptions. It really doesn’t matter how profitable they are; it almost doesn’t even matter how much revenue they have. It’s the subscription growth that really attracts them, because then it makes them a candidate for M&A for, probably, old media,” said Schlossberg, BK’s managing director of foreign exchange strategy.
“Until and unless their subscription growth rate slows down, I think it’s very dangerous to short them at this point. That’s the dynamic that’s really driving them, and that’s the dynamic that could push them even higher as we go from this point.”
In addition to Roku, Pandora, and Spotify, the Chinese streaming giant iQiyi (NASDAQ: IQ) surged in June, rising nearly 28% last month alone. The company has seen a pullback this month as investors shun Chinese stocks in reaction to Trump’s trade war, but this company remains one to watch.
Here’s what you need to know about these four companies.
Roku (NASDAQ: ROKU)
Roku surged last month thanks in large part to the introduction—and quick uptake—of its new advertiser-supported Roku Channel.
“The rapid adoption of the Roku Channel gives us incremental confidence in the channel’s ability to garner viewership on other platforms, such as Samsung (smart TVs), allowing Roku to monetize a broader portion of the OTT (over-the-top) ecosystem than we had previously assumed was possible,” said Oppenheimer analyst Jason Helfstein.
The company’s popular set-top boxes have seen tremendous growth in the era of consumers ditching traditional cable packages. But the future of the company is in software licensing, a segment that recently surpassed the company’s hardware segment and now provides more than half of Roku’s total sales.
The software segment comes with 71% gross margins compared to the hardware segment’s 16% margin, making this shift in focus incredibly attractive for investors.
Pandora (NYSE: P)
Pandora is up 60% year-to-date, though still no where near its 2014 highs.
The company had a rough 2017 with a string of hit-and-miss earnings reports, but had a great 1st quarter this year with strong sales of its Premium Access program, which gives users of the ad-supported free service a touch of the paid subscription service for a 15-second ad view.
With the AT&T deal, customers who sign up for AT&T’s unlimited data plan will be able to choose from the ad-free Pandora Premium service or a few other streaming services for free with their subscription. Analyst Matthew Thornton of SunTrust Robinson Humphrey anticipates this deal could see Pandora Premium subscribers rising by 500,000 by June 2019.
My guess is that deals such as the AT&T deal are the future for Pandora, and more such deals in the coming years could send the stock soaring.
Spotify (NYSE: SPOT)
Spotify certainly qualifies as a speculative play.
There aren’t many fundamental reasons to invest in the music streaming powerhouse. The company has high debt levels, offers no dividend, and has negative profit margins. But as with many other buzzy young companies, the company offers incredible growth.
Its expected revenues for 2018 are $5.2 billion. For 2019, that number jumps to $6.6 billion.
The company boasts 99 million users to its ad-supported free services, with another 75 million paid subscribers. Those premium subscribers made up more than 90% of the company’s $1.37 billion Q1 revenues. And premium users climbed 45% from the same quarter last year, outpacing the free service’s growth of 21%.
If you’re not ready to jump in yet—and who could blame you, at $180 per share, SPOT is a pricey speculation—Spotify might be worth keeping on your radar.
iQiyi (NASDAQ: IQ)
iQiyi is best described as China’s Netflix. The company went public in late March at $18 per share, and was up above $40 by mid-June.
Trade war headlines have sent investors running from Chinese internet stocks, sending IQ plunging back down to the $30 range. But it might be time to buy the dip.
iQiyi is a mega growth company that is building a direct-to-consumer media platform with original content in one of the biggest streaming markets on the planet – just compare China’s 800 million internet users to 300 million in the U.S.
Currently, the company has 60 million users, but growth to 100 or 200 million users over the next few years is possible and likely. iQiyi saw total sales increase 57% year-over-year in the first quarter, and it is expected that expansion in its paid-member and advertising-based businesses will push total revenue up around 45% in the next earnings report due later this month or in early August.
With such massive and believable growth prospects in its future, IQ stock may explode higher in the coming years.