Investors should be concerned about buying companies at cheap valuations and avoiding rich valuations. This requires discipline and the heart to invest in underdogs and companies that are temporarily down and out.
Video media stocks are no exception. Investors who can stick it out for years ought to consider Sony (SNE) and Coinstar (CSTR). Today the markets hate these companies, trading them at low valuations. Sony trades at a low 0.19 price-to-sales ratio and a discount to book value. Coinstar is also cheaply valued at a low 0.71 sales multiple and a reasonable 12.08 price-to-earnings ratio. Each of these companies is making headway into streaming video: Coinstar has a joint venture with Verizon (VZ), and Sony has signed agreements with Amazon (AMZN).
There is much more excitement about the current leaders of the streaming video market. These include Comcast's (CMCSA) Hulu, Amazon, and Netflix (NFLX). Each of these three stocks is trading at much higher multiples: Amazon trades at a 1.95 sales multiple and ran a loss over the last twelve months; Netflix stock trades at a 637.4 earnings multiple and a 2.87 sales multiple. These multiples just make no sense. Netflix and Amazon prices anticipate fantastic earnings growth and Comcast's earnings multiple is a touch on the pricey side.
This divergence in valuation also doesn't make sense given how Coinstar has healthy analyst growth estimates.
A contestable market
Netflix bulls believe that the stock deserves a higher price multiple because it's the market leader and it has streaming video locked down. This is premature. By this logic Apple's (AAPL) share price should be making new highs and Samsung's market share should be dwindling. Of course, the opposite has transpired. Industries change, and there are no guarantees.
Companies involved in video and streaming seem to get this concept, and are scrambling to make deals to stay relevant amid competition and change. One deal involves a stake in Hulu, a company that provides online TV service to customers for free and as a premium paid service. Both suitors already have an existing one-third stake. Comcast will continue to remain the minority investor in Hulu and will stay away from the board for making decisions on the sale either to Disney (DIS) or News Corp (NWSA). Upon successful completion of the deal there will be a change in business model whereby it will become advertisement-focused in case Disney holds it, or aims to strengthen revenue by maximizing subscription if News Corp succeeds in the buy.
In another deal, Scripps Networks Interactive (SNI) signed the first online subscription-based licensing agreement with Amazon. By this agreement the Amazon video subscribers will be able to view past seasons of popular TV shows like House Hunters and Anthony Bourdain: No Reservations from Scripps channels. This would help Amazon to increase the customer base by a significant number, and would also help Scripps to increase revenue further from existing $605 million as on December 2012. This is something of an experiment. Scripps might lose its existing customers to shift to the new online subscription deal, which could result in lower ratings for its channels and less revenues from advertisers. Amazon has also signed multiple agreements with CBS (CBS), Sony, and PBS Distribution for broadcast of all its popular TV shows online.
Similarly, Netflix signed licensing deals with Time Warner's (TWX) Warner Bros. Television unit and Turner Broadcasting for online viewing of previous seasons from Cartoon Network, Warner Bros. Animation, and Warner Bros. Television. The company also negotiated a deal from Disney for live streaming of movies from Pixar, Marvel, and Lucasfilm.
These negotiations demonstrate that there is still a lot of activity in this industry and that no one should assume tomorrow's revenues as a given.
Value-minded investors should consider Sony and Coinstar as speculative bets. This conclusion is not based on them being the best companies, but the fact that they are cheaply priced. Investors should wait for other stocks on this list to have lower price multiples before they consider investing.