Streaming Services: Key Stocks to Watch for Investment Potential

The streaming industry has become a staple in daily life, akin to essential habits like grabbing a coffee or checking social media. A recent Forbes study reveals that 99% of US households now subscribe to at least one streaming service. This trend extends globally, with Latin America and the Asia Pacific experiencing subscriber growth rates of 8% and 21% respectively. The demand for streaming is clear, but so is the competition. Companies must balance fair pricing and diverse content to maintain customer satisfaction. Forbes also notes that 45% of Americans canceled a streaming service due to high costs, underscoring the competitive market's potential for clear winners and losers.

Netflix: Dominance and Financial Strength

Netflix (NASDAQ: NFLX) stands as the industry leader. Originally a DVD rental service, Netflix has transformed into a streaming giant, especially after launching its “Netflix Original Series” in 2013. By 2014, Netflix had 50 million subscribers worldwide, and today it boasts over 270 million paying subscribers, with a 10-year compound annual growth rate (CAGR) of 19.3%.

Financially, Netflix's first quarter of 2024 was robust. Revenue grew by 15.9%, from $8.2 billion to $9.5 billion. Net profit surged by 78.7% to $2.3 billion, with a positive free cash flow of $2.1 billion for the quarter. Notably, Netflix's operating margin in the USA and Canada stands at an impressive 28.1%, significantly higher than Disney's 0.8%.

Netflix's financial health is underpinned by strong revenue per user and high operating margins, making it a profitable business. The company plans to invest $17 billion in content this year, primarily in original shows. Upcoming releases like “Arcane Season 2” and “Black Mirror Season 7” are highly anticipated.

iQIYI: Emerging Powerhouse in China

iQIYI (NASDAQ: IQ), often dubbed the Netflix of China, specializes in Chinese films and series. As part of Baidu, iQIYI leverages advanced technology like AI and big data to enhance its streaming experience.

In the first quarter of 2024, iQIYI's R&D spending was 5.4% of total revenue, slightly lower than Netflix's 7.5%. While iQIYI stopped reporting quarterly subscriber numbers and revenue per user, it had an average of 111.9 million subscribers in 2023.

iQIYI's first-quarter 2024 financial results show a 5% revenue decrease to $1.1 billion, with membership service revenue declining by 13% year on year. However, net profit increased by 6% to $90.8 million, and free cash flow reached $126.8 million.

iQIYI's strategic focus on AI to boost ad revenue and its growing content distribution business highlight its potential. Content distribution revenue grew by 27% year on year, driven by the popularity of iQIYI’s original series. Drama remains the top category, leading viewership for the past nine quarters.

Investment Perspective

Streaming services have become indispensable, and companies like Netflix and iQIYI are at the forefront. For investors, these two streaming giants present compelling opportunities as they continue to innovate and expand in a highly competitive market.

• Netflix: Its strong financials, high operating margins, and substantial investment in original content position it as a solid long-term investment. With a history of growth and profitability, Netflix is a key player worth considering for your portfolio.

• iQIYI: As a major player in the Chinese market, iQIYI’s use of advanced technology and focus on high-quality original content offer significant growth potential. Despite short-term revenue challenges, its profitability and strategic initiatives make it an attractive investment.

Investing in these companies could be a strategic move to capitalize on the future of entertainment. Both Netflix and iQIYI have demonstrated their ability to adapt and thrive, making them strong candidates for any investor looking to gain exposure to the growing streaming industry.