7 Things to Know About Investing in Media and Entertainment Stocks

  • Nov 27, 2019 AEDT
  • Team Kalkine
7 Things to Know About Investing in Media and Entertainment Stocks

Media and entertainment stocks include companies in the business of publishing, broadcasting, radio, media, digital offerings, etc. The industry falls under the cohort of the communication services sector.

Predominantly, entertainment and media sector stocks are about having mainstream content such as Marvel or DC, Game of Thrones or Narcos, Avengers or Fantastic Four and whatnot.

As Generation Y and Z are more interested in entertainment through the likes of Netflix and Amazon Prime rather than on TV, it has triggered a fundamental shift in the industry, and large conventional players are trying to navigate this path which has been disrupted by the new-age solutions and innovative products.

The highly conventional players in the industry have started to launch similar products to light-up the battle with new-age solutions, in a bid to gain some market share and level the fight with disruptors.

Australian Insights

In Australia, the industry has seen consolidation over the past few years, with several proposed transactions under the pipeline. And, the businesses in the country have been positioning themselves to better steer through a slowdown cum disruption in the industry.

In the past, we have seen the merger of Fairfax Media and Nine Entertainment Co. Holdings Limited (ASX: NEC). In FY 2019 ended 30 June 2019, Nine Entertainment acquired the remaining stakes in CarAdvice.com Pty Ltd and 112 Pty Ltd (known as Drive).

At the year-end, Nine Entertainment reported that Events and Australian Community Media businesses were sold during the year, and the sale of Stuff NZ was expected to be completed within a year from the date of the acquisition.

Recently, Nine Entertainment completed the takeover of Macquarie Media Limited. More importantly, Nine Entertainment also holds a controlling stake in Domain Holdings Australia Limited (ASX: DHG).

In FY 2019 ended 30 June 2019, Domain Holdings Australia Limited (ASX: DHG) acquired a 68.5% stake in Homepass Pty Ltd and 67.4% in Commercialview.com.au Ltd.

In October 2019, Prime Media Group Limited (ASX: PRT) and Seven West Media Limited (ASX: SWM) reported that the companies have entered into a binding agreement to create a merged entity.

Whilst the media and entertainment industry has been going through the realms of corporate restructuring; there are players in the space with exciting technologies and new businesses. The Australian companies in the space also offer investment opportunities in the budding space like cloud gaming platforms, whereby Alphabet/Google has launched its much-awaited platform – Stadia.

Cloud gaming platforms are catching up with the pace of revolution in the gaming industry, after a much wider disruption by Tencent’ PlayerUnknown’s Battlegrounds (PUBG) in the mobile gaming space.

The Australian media and entertainment industry also hosts cloud gaming platform companies like Emerge Gaming Limited (ASX: EM1) and Esports Mogul Limited (ASX: ESH), and sports gamification platform companies like SportsHero Limited (ASX: SHO).

The media and entertainment industry also have companies that might be vying for profits in the near term. These names include Crowd Media Holdings Limited (ASX: CM8), which contracted losses by 81.6% to $4.8 million in the year ended 30 June 2019 from $26.04 million in the previous year, and this was despite a y-o-y drop of 38% in revenues from ordinary activities.

In addition, SportsHero Limited narrowed losses to USD 2.32 million in the year ended 30 June 2019 from USD 4.49 million in the year ago period.

Seven things to know about Media and Entertainment Stocks in Australia
  1. Business Model Evolution

Media and entertainment companies have been continuously evaluating and updating their respective business models to cope with the disruptions alongside the changes in consumer preferences that are much skewed towards on-demand, customised, and multi-platform type of service delivery at one price.

  1. Consumer Sensitive

The industry is sensitive to the change in consumer preferences and spending habits at the product level. Therefore, the companies need to be vigilant to efficiently and proactively adapt to the changes in consumer taste.

The fight for the best contents is likely to remain resilient, augmented with increasing consumer expectations like we said earlier; the industry is about Marvels or DC, Game of Thrones or Narcos, etc.

  1. Industry Sensitive

Companies in the media and entertainment industry generate substantial revenues through advertising and marketing campaigns. Intriguingly, when macro-economic conditions tend to weaken, it impacts the spending habits of corporations in advertising and marketing, as they try to cut costs amid moderating revenues.

  1. Efficiency

As widespread disruptions have triggered in the industry, whereby the advertising models are constantly evolving such as the traditional TV advertisements to notifications from applications in mobiles, the companies in the sector have to arrive at effective plans that are not only designed to the meet the expectations in the near-term but in the medium and long-term as well.

  1. Expansion

Expansion and diversification remain the key at the base level to have sustainable revenue streams and a less-risky ecosystem for companies. Despite growing nationalism and escalating de-globalisation, digital businesses have the prowess to flourish across jurisdictions.

And, presently, the companies in the industry are much more open and interested in expanding footprint, client base, revenue streams, brand presence, etc.

  1. Cyber and Web – the risks of new age

Companies are required to pay diligent attention to the cyber risks posed by the business operations, and preventive measures should be in place in order to provide high-quality data protection to the consumers.

In the past, we have seen the hackers stealing the data from WhatsApp and the Cambridge Analytica case, which had widespread ramifications to the companies.

Such events possibly signal a wake-up call to the companies with personal consumer data in their offerings. Therefore, the new-age risks require additional attention and effective measures, and in turn, efficient investments.

  1. Corporate Restructuring

The firmed-up footing of modern global social, video, advertising and e-commerce giants have been sending signals of rising competition for conventional players. As a consequence, the merger and acquisition activity has taken a leap in the last few years.

Companies are restructuring their portfolios to cope with ongoing disruptions, and investment bankers and strategic advisors have had a broader role to play in navigating these companies to a favourable position that would deliver the shareholder value.

Such restructurings are quite crucial for the senior executives of the companies, as they would play an even more critical role to deliver on the expectations from the changes that have been made to businesses and portfolios.

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