Digital Multimedia: The Channel for Profits
I first started working as a journalist in 1981, during the “dead tree” era of media. Back then, newspapers, newsletters and magazines were print-based. The Pentagon was running an obscure military project called the Advanced Research Projects Agency Network (ARPANET), the origin of the Internet. Whenever I wrote a story, it would arrive the next morning in the hard-copy newspaper, with a thud in my driveway.
How the world has changed! Today’s media serve up a vast digital cornucopia of anything you want, when you want it, on demand, on any WiFi-connected device, twenty-four seven. For investors, the profits can be enormous.
Investment winners during the COVID-19 crisis have been media and entertainment companies, as quarantines increasingly drive people to seek diversion and information from their televisions and mobile devices.
The benchmark iShares Evolved U.S. Media and Entertainment ETF (IEME) has generated a total return of 24.28% during the past 12 months, compared to 17.58% for the SPDR S&P 500 ETF Trust (SPY) over the same time frame, as of market close January 7.
Factors are currently in place, in large part created by the pandemic itself, that are positioning multimedia companies for continued upward trajectory, even after this virus is under control. Below, I’ll pinpoint one long-term media technology trend that’s particularly promising.
One positive for the markets was the official certification by Congress on Thursday of Democrat Joe Biden as president-elect of the United States. The occasion was marred by pro-Trump violence in the nation’s capital, but Wall Street took cheer that the Electoral College formalities are over.
The Dow Jones Industrial Average on Thursday rose 211.73 points (+0.69), the S&P 500 climbed 55.65 points (+1.48%), and the tech-heavy NASDAQ jumped 326.69 points (+2.56%). All three indices hit record highs.
In pre-market futures trading Friday, the three indices were set to expand on their record gains, as Wall Street looked past Capitol Hill mayhem and bet on Democrat-driven fiscal stimulus. Technology and media stocks continued to show momentum.
On demand, 24-7…
Investors who pick the right media stocks stand to reap a fortune, but the bewildering pace of technological change makes it difficult to sort the winners from the losers. In a minute, I’ll steer you toward a winning media play.
The pace of “cord cutting,” the phenomenon of viewers canceling their cable subscriptions and switching to online options, is mounting. Many media giants keep adding broadband subscribers while losing video subscribers.
This dynamic is poised to deliver outsized gains in 2021, as economic growth accelerates and consumers get even more accustomed to streaming video at ultra-fast speeds.
Historically, communications stocks were viewed by investors as low-beta blue chips. They lacked volatility and drama and conferred steady growth and income, making them staples of retirement portfolios.
However, for the past four decades, starting with the dawn of the de-regulatory Reagan Era, a relaxation of anti-trust rules has fueled a relentless series of mergers and acquisitions.
Mega-merger activity has shaken up the telecom and media landscape, with a handful of transnational behemoths controlling most news and entertainment. That consolidation won’t abate anytime soon, as media giants seek economies of scale and try to stay ahead of fast-moving digital innovations.
Amid a slew of negative factors, including economic damage wreaked by the COVID-19 pandemic, one salient tailwind is propelling media stocks: the mergers and acquisitions (M&A) bonanza. The run-up in stock prices since late March 2020, notably among big media companies, has filled the coffers of corporate giants with huge piles of cash. Those companies are putting that money to work, by going on a shopping spree.
Cable firms are leveraging the M&A boom to transition from content distributors to content creators, with a focus on streaming video on demand (SVoD). The market is far from saturated. Global revenue in the SVoD segment is expected to reach $30.4 billion in 2024, up from $25.8 billion in 2020 (see chart).
Through corporate consolidation and technological convergence, the old lines dividing various media have blurred. All types of communications now form a vast interconnected and cross-owned “media borg.” And as The Borg like to say in the Star Trek movies: “Resistance is futile.”
However, for the multinational corporations that own and operate this media, there are downsides. Fierce competition puts pressure on prices (and profit margins) and disruptive technologies threaten the status quo. Investing in new infrastructure is expensive.
Sometimes, what appears to be the right strategic path turns out to be a dead end. Viewer tastes can be fickle. Companies have been known to spend a fortune on original content that no one wants to see. Netflix (NSDQ: NFLX) comes to mind. Instead of prestigious awards and boffo ratings, these companies simply end up with debt (and angry investors).
Management turnover is rapid. Media CEOs can be lauded as visionary heroes one day…and the next day, fired as scapegoats. The stock prices of media losers can tank overnight. You need to make the right investment choices.
5G: tuning into gains…
At the heart of multimedia’s evolution is the global implementation of 5G (“fifth generation”) wireless technology, which provides super-fast connectivity and download speeds. Media companies that fall behind in the 5G race will stay behind.
The expansion of streaming 5G services exemplifies a mega-trend, which is why competition in the media/telecommunications space is so brutal.
Our investment experts have unearthed a little-known $5 stock that’s a crucial player in 5G wireless capabilities. It’s an under-the-radar tech innovator that nonetheless trades at a reasonable valuation, despite the recent run-up in the broader stock market.
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