The Future of TV: These 2 Stocks Are Must Buys

In an excellent Q&A published Tuesday, CNBC asked Barry Diller, Jeff Zucker, Peter Chernin, and other media insiders what TV would look like in three years. It’s a question that consumers, industry types, and investors continue to contemplate. 

If you’re interested in betting on the future of TV, my take on comments made in the article suggests there are two clear winners from the ongoing transformation of TV.

Read on, and I’ll share the two stocks to buy if you want to be on the right side of television history.

This Is a Must Own

I don’t think there’s any question that Netflix (NFLX) has had its doubters -- NFLX traded as low as $162.71 in June 2022 -- but reading through the various comments from the CNBC piece, I don’t know how you can’t conclude that Netflix will still be one of the top players three years hence. 

One of the questions asked of the article’s participants: “In three years, which major streaming services will definitely exist?” All eight people who answered the question either led with Netflix or it was on a shortlist. 

“There’s only one streaming service that’s dominant, now and forever, and that’s Netflix. But many others will exist,” stated IAC (IAC) Chairman and Senior Executive Barry Diller. 

Barry Diller has done plenty in his lengthy business career -- CEO of Paramount Pictures for 10 years, CEO of Fox Inc. for nearly eight years, 30 years as CEO of various companies related to IAC -- he is undoubtedly someone qualified to chime in on who the most prominent players are today and will be in the future. 

While there are significant doubts about Netflix’s move to crackdown on password sharing, you can be sure that everyone in the streaming business is paying close attention to what happens to the world’s biggest video streamer in its effort to get every subscriber paying their fair share. 

Websites that argue Netflix will face a backlash from this move don’t understand the massive amounts of capital required to fund content creation on this scale. It’s no different than the New York subway system working to prevent fare cheating. But, unfortunately, everyone who doesn’t pay prevents the system from providing the best user experience possible. 

In the end, it’s outright theft. But I digress. 

Oppenheimer Manager Director and Head Research Jason Helfstein recently discussed Netflix revenue and password crackdown. 

“So we do think a good chunk of their subscribers will probably pay more to keep certain members of their household or, let's say, their children who no longer live with them, on their plan, or their mother, for example. But, you know, we think this is a net positive. They know what an advertising subscriber is worth. They know what password sharing is worth,” Helfstein told Yahoo Finance. 

I remember when Starbucks (SBUX) changed the way rewards were earned. People were up in arms about the change -- they went from rewards per visit to rewards per dollar spent -- but it turned out that most people felt (myself included) this was the fair way to reward customers. 

The cheapskates were never as valuable to Starbucks, so why care if they were offended? The same applies to Netflix. 

As Helfstein said, “They're [Netflix] spending more than everybody else in streaming, and they have a profitable business.”

These are the only two things that ought to matter to NFLX shareholders. Keeping fare cheaters happy isn’t one of them.   

Linear TV’s Only Survivors

If the NFL were a public company, it would be my second selection for betting on the evolution of TV. But, no matter what happens, the world’s most successful professional sports league will be at the front of the line. 

Whether sports are consumed through legacy TV or streaming services, most will be live and real-time. As the Super Bowl continues to demonstrate, advertisers will pay big dollars -- an average of $6 million to $7 million for a 30-second spot for Sunday’s big game -- to get in front of a captive audience. 

Jeff Zucker, the former head of CNN, when answering whether legacy TV would die in three years, said, “It will continue to exist. Obviously it will have fewer subs than it does today. News and sports will keep it alive,” Zucker told CNBC. 

Read through CNBC’s Q&A, and you ought to conclude that legacy TV will continue to exist for many years beyond the next three. Will cord cutters weaken it? It already has been. 

Investors don’t know whether it will be a situation of death by a thousand cuts or one quick bullet to the head. 

So, how should one play sports and news?

Disney (DIS) is the obvious choice as it owns both ABC Broadcasting and ESPN. According to Disney’s latest 10-K, the company will spend $44.9 billion on rights fees over the next five years for live sports. In 2022, ESPN’s 12-year extension kicked in with the NFL. The average cost per year is $2.6 billion.   

As Sportico pointed out in November, ESPN should get $8.1 billion in affiliate revenue in 2023, which will help pay for the outlay. 

The more significant issue is that ESPN continues to lose subscribers. It lost 10 million of its legacy TV subscribers over the past two years. Nevertheless, it has 74 million subscribers through cable, satellite, and telecom companies. ESPN+, its direct-to-consumer streaming service, has another 24.3 million subscribers, bringing the total to 98.3 million. 

“As much as analysts tend to obsess about the DTC business, the traditional pay-TV model remains in the driver’s seat, as Disney’s linear networks generated $8.52 billion in operating income during the fiscal year that just ended,” Sportico stated. 

“By comparison, the DTC segment lost $4.02 billion over the same 12-month period—of which $1.56 billion was assigned to “ESPN+ and other.” (That latter figure is up from a loss of $1.12 billion in fiscal year 2021.).”

The big question is what CEO Bob Iger will do with ESPN and ESPN+.

Wells Fargo analyst Steven Cahall said in December in a note to clients that he believes the company could spin off ESPN and ABC before the end of 2023. 

“ESPN, traditionally the cash cow, is neither owned-IP nor global the way the rest of Disney is. With linear and sports trends diverging from core IP, we think severing the company is increasingly logical,” Barron’s reported Cahall’s comments.

Of the 20 analysts covering Disney, according to Barchart.com data, 17 have a Strong Buy or Moderate Buy rating (4.60 out of 5) with a $126.28 mean target price. 

Buying Disney stock gives you two great businesses for the price of one. 

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