Today, just about any company involved or associated with streaming movies or TV shows over the Internet seems to have evaluations that we haven't seen in quite a few years. Companies like Netflix, Apple, Akamai and others have share prices that seem to be based more on excitement, rather than basic business fundamentals. While there is nothing wrong with being excited about what's taking place in the market and the growth we are seeing in digital content consumption, many have now set expectations for these companies that simply can't be achieved.
I do a lot of calls with institutional money managers on the buy and sell side and lately, far too many of them are getting all caught up with the idea that online video is going to somehow replace cable, DVDs, or other forms of media. The fact is that today, digital content offerings from the likes of Hulu, Netflix, Apple and Amazon are a compliment to traditional media. There is no doubt that digital is growing, but online video is not replacing cable and streaming movies are not replacing DVDs today, or any time soon. Seismic shifts like that don't happen overnight or over a few years but rather usually over a long period of time, measured by a decade or more. To put it in perspective, Netflix has only been streaming for three years and while they have been the hands down leader, DVDs and cable TV are still around in volume.
When you look at the kind of money Netflix is spending to license content for digital, there is no way to run the numbers to show that Netflix can possibly sign up enough new subscribers over the next five years to cover their $1B licensing deal with EPIX. Yet in the past six months Netflix's stock has gone from $74 to $165 a share simply due to excitement. Financial analysts seem to be asking more about the rate of growth rather than how these services work, what the quality looks like, what devices they work on and what the business model looks like. I am amazed at how many financial analyst pieces I read where the author talks about a particular streaming service yet admits they have never used it. How can they possibly have tens of millions of dollars tied up in a company yet haven't spent $99 to buy a box and actually use the service for themselves?
I see a lot of investors making decisions based on three to five year projections of the size or growth of the industry while ignoring the reality in today's market. I keep hearing about devices, yet 95% of the time when I ask someone on Wall Street how many Roku's, TiVo's or broadband enabled TVs have been sold, they have no clue. How is that possible? How can you track or invest companies in this space who's sole growth is dependent on these devices yet not know how many have been sold, how they work or what the service looks like?
The last thing we need is another
bubble, yet I'm afraid that what we currently have. I keep hearing or
reading things that imply that the ad dollars from TV are flowing to
online. Online video advertising is absolutely growing, but lets keep things in
perspective. Last yet
the online video advertising market was around $500M, the broadcast TV
ad market was $60B. One is not putting the other out of business. And while digital video consumption is growing, it's not growing as fast as some may think. NPD just released numbers stating that 75% of all U.S. consumers did not
stream or download any multimedia content of any kind in the past three
months. That's the kind of data we need more of in the market to keep things in perspective.
Now I'm sure some are going to comment that I'm always negative or I
always have to try and ruin someone's high but the fact is that setting
the proper expectations is crucial in the long term
success and growth of any industry which is all I care about. I'm not in this for the short-term and I don't play stocks. I've been in this industry for
fifteen years and I want to be in it for another fifteen more. But in order for
that to happen, the market needs to evolve into services that can
become profitable and sustainable on real profits, not hype or future projections. Just take a look at how many companies in this space
are actually profitable today. Very, very few. To help them get there we
need sensible, rational thinking with expectations they can meet. Not
evaluations based on wild projections and statements about one service
killing off and replacing another.
I hate to say it, but the current bubble we are in is not going to be able to last much longer. Some of these companies are going to have to get knocked down and many on Wall Street are going to have to come back to reality. We need more folks looking at the core fundamentals of what companies have to offer as opposed to that day trader mentality which is simply trying to figure out if a stock will go up or down the next day.
Disclaimer: I have never bought, sold or traded a single share of stock in any public company ever.
