Rapid technological change has warped the film and home entertainment industries, and not all of the advancements have been positive for film producers. With the move toward a $1 a day or all you can stream platform, studio executives are up against a wall and a hard place -- they need to protect their cash cow home entertainment market yet they also feel a need to be "high tech."
Here are four stocks to research in the film industry that are affected by shifts in rental, sell through, and box office sales. Many of these stocks are trading at cheap enough valuations that if Ultra-Violet takes off some of these stocks are likely poised to be revalued at higher multiples in the future.
Lions Gate (LGF) -- Lion's Gate looks quite expensive to us at 63X earnings and we would avoid the stock based on valuation and also industry trends from the devaluation of the product through the relationships with SVOD, Netflix (NFLX), and Redbox. We think the race to the pricing and window bottom will eventually hurt film studio margins as production companies find it harder and harder to penetrate the lucrative home media market. We think the studios have "Killed the Golden Goose" by letting mom and pop retail die off almost completely. In order to drive margin, the movie industry was a lifestyle product and now it's pretty much just a commodity industry with little in the way of product differentiation happening.
Netflix -- Netflix is the original mega-momentum movie stock. That being said, it pulled a "John Carter" sized flop. NFLX shares are down more than 50% since last summer. Thankfully, our readers nailed this one and made some big money on the short side. We don't like NFLX on the long side because we think rising content procurement costs could eventually send Netflix out of business -- they seem to have painted themselves into the streaming corner. Meanwhile, DVD is doing just fine for Coinstar!
Coinstar (CSTR) -- Redbox is on cruise control right now and is eating everyone's lunch. The company has unstoppable momentum, but Hollywood may one day realize sacrificing mom and pop stores to the alter of vending machines could eventually strip the industry of its lifeblood -- the home video and mega-blockbuster markets. You see, with the advent of $1.20 a day movies, Hollywood has to produce more low budget movies because large blockbuster movies are not cost effective at $1.20 a day. CSTR faces the risk of a backlash by studio executives in our view and one day the model could be compromised as it makes the film-making industry relatively unsustainable.
Hastings (HAST) -- Reported a net loss of $8MM in the most recent quarter. Barring a valuation allowance that accounted for 8.5MM of the loss and store closing reserves of around $2MM, Hastings posted an adjusted profit in the latest quarter reversing two consecutive Non-Gaap losing quarters. With the float almost 20% short and with a price-to-tangible-book ratio of just .20X we think Hastings is a good short squeeze idea that could handsomely reward longs over time.
Disclosure: I am long HAST.