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Investors Are Tuned Into Kings of Content

24 July 2014 in Trading Ideas

It may be the traditional summer rerun season, but purveyors of broadcast and online video content are as popular as ever.

Last week saw the startling news that Rupert Murdoch and his 21st Century Fox had, in the past month, bid $80 billion to take over media conglomerate Time Warner, which as the New York Times stated, would be the biggest media deal in more than a decade.1

As the Times pointed out, Time Warner rebuffed the effort and no talks are underway, but people briefed on the matter have said that Murdoch remains determined and is “unlikely to walk away anytime soon.”

 

Unsurprisingly, the news has done wonders for shares of Time Warner, which have now jumped 28% in the past month.

Other content-provider investments have also benefited. The Content is King motif, where Time Warner has a 19.3% weighting, has gained 6.6% in the past month. During that same period, the S&P 500 is up 1.4%.

In the past 12 months, the motif has increased 19.8%; the S&P 500 has risen 20.3%.

Combining 21st Century Fox and Time Warner would bring under one roof some of the biggest sources of content: HBO, Fox Broadcasting and the movie studios Warner Brothers and 20th Century Fox, the Times reported, noting that Murdoch’s pursuit is likely to set off a wave of takeover battles elsewhere in the industry as other race to keep up – which could be another spark for the stocks of content providers.

Looming large over these deals, the Times noted, is the competitive threat from Silicon Valley. Internet giants like Google, Amazon, Netflix and others are pouring resources into original content and developing next-generation TV companies.

Netflix, for its part, flexed a little muscle this past week, announcing as part of its second-quarter earnings report that it had surpassed 50 million total members for its streaming service, including free trial memberships.2

The company said its paid subscriber total rose 34.7% to 47.99 million, which fueled a 25.3% rise in total revenue from a year earlier to $1.34 billion. Meanwhile, second-quarter profit rose to $71 million from $29.5 million a year ago.

The Times said the results underscore a pivotal shift in Netfix’s vision. Three years ago, the company was reeling from a plan to increase prices and split itself into two separate companies, one focused on DVD mailing and another for its video-streaming service.

After abandoning the plan, Netflix steadily turned its business around, the Times said, based on the thesis that Internet television is replacing traditional TV, apps are replacing channels, remote controls are disappearing and screens are abundant.

To lure subscribers, Netflix has been pouring resources into exclusive programming, including “House of Cards” and “Orange Is the New Black.”

It’s a thesis that investors in content-provider stocks are more than happy to see continuing to play out.

1Andrew Ross Sorkin and Michael J. de la Merced, “Murdoch Puts Time Warner on His Wish List,” nytimes.com, July 16, 2014, http://dealbook.nytimes.com/2014/07/16/rupert-murdoch-said-to-have-made-offer-for-time-warner, (accessed July 22, 2014).

2Emily Steel, “Netflix, Growing, Envisions Expansion Abroad,” nytimes.com, July 21, 2014, http://www.nytimes.com/2014/07/22/business/media/netflix-says-it-topped-50-million-subscribers.html.

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