In today's rapidly evolving economy, the technology and media sectors are converging before our eyes, creating unique investment opportunities in the process.
Discerning investors are always on the lookout for companies poised to lead this transformation. Three Motley Fool contributors focused on technology and media investing have joined forces to explore advances in digital advertising, streaming content, and interactive platforms. Let's take a closer look at his three exciting investment ideas in different areas of the entertainment industry.
The sphere was launched into orbit last quarter, and insiders are making big purchases.
billy duberstein (Sphere Entertainment): Sphere Entertainment (SPHR -4.18%)formerly known as MSG Entertainment, was formed when MSG Entertainment was split into two companies. Madison Square Garden Entertainment Corporation Partnered with Sphere Entertainment in April 2023.
Of the remaining two, Sphere seems more interesting, including Las Vegas' new-age concert venue The Sphere. In addition, Sphere also owns his MSG cable network, which, while profitable, faces growth headwinds from cord-cutting. Sphere also held Tao's restaurant/club business, but Sphere has since sold that business, leaving only The Sphere and MSG Networks.
The company just reported full first quarter operating results for The Sphere Las Vegas, and they were encouraging. There will be a residency by the band U2 and a screening of director Darren Aronofsky's films. postcard from earth, Venue generated revenue of $167.2 million and non-GAAP (adjusted) operating income of $14.1 million. It may not seem like a huge benefit, but venues will now be more efficient at showing both movies, concerts, and dance parties, making them more cost-efficient while cramming more events into their schedules. It seems possible. .
In fact, The Sphere's “direct” operating expenses were only $67.3 million, with selling, general and administrative expenses making up the bulk of its costs. In the future, as The Sphere becomes a more well-known destination, it will not require as much marketing investment. With jam bands Phish and Dead & Co. already announcing residencies this spring, the venue appears to be becoming a trending destination for entertainers and customers alike.
The company also plans to franchise The Sphere to other cities internationally. But the company won't have to incur the huge costs associated with building a venue it owns in Las Vegas. In fact, because The Sphere owns the construction company that will build the future Sphere, the company will collect construction revenue while the future Sphere is being built and collect a capital-light franchise fee thereafter. Become.
On the other hand, the company's evaluation seems persuasive. The consolidated company generated total operating income of $51.4 million in the last quarter, which averaged to an annualized rate of $205 million. Sphere's market capitalization of $1.67 billion is just about eight times adjusted earnings.
Management appears to agree, with Chairman and CEO James Dolan purchasing approximately $2.4 million worth of stock on February 26th, and additional shares on February 28th. Bought $3.1 million worth of stock. These purchases were not cheap, at about $40 to $41 per share. Today's stock price is $48.
Overall, The Sphere is a new consumer entertainment franchise that investors shouldn't ignore.
The Trade Desk challenges the future of effective, privacy-friendly advertising
Anders Byland (Trade Desk): Imagine if the Madison Avenue advertising guys had a matching service for ads and eyeballs.that's what trade desk (TTD -0.29%) Connect advertisers and consumers across channels to optimize the use of your marketing budget.
Billboard and TV advertising has gone largely digital, and The Trade Desk helps ad buyers make the most of digital advertising channels. It's not just about advertising. It's about making meaningful, long-lasting connections.
It's not as easy as it seems. The identities of potential ad viewers are now protected by multiple layers of privacy protection, making their privacy even stronger. alphabet Later this year, support for third-party tracking cookies in the ubiquitous Chrome web browsing engine will be removed.
But The Trade Desk has a new system for tracking anonymized user behavior and is ready to deal with that attack. Unified ID 2.0 (UID2) provides an encrypted user consent identifier that enables personalized advertising while respecting user privacy. The system combines web users' online content consumption patterns into anonymous populations with similar habits, providing ad buyers with the data they need and directing viewers to ads they feel are relevant to them. can be tied to.
UID2 is an open system, available to any marketing project manager or ad buyer, but it was invented and is powered by The Trade Desk. By making UID2 accessible to everyone, we're not just leading by example. The entire industry is calling on us to up our game. This approach not only solidifies his The Trade Desk's position as a pioneer, but also challenges the market to adopt higher standards of privacy and personalization.
This is a bold move and shows a leader who believes not only in innovation, but also in the positive ripple effects it creates across the digital landscape. Given this bold backdrop, it's no surprise that The Trade Desk has emerged from the inflation-driven downturn in the digital advertising market stronger than ever. The company has outpaced the revenue growth of every digital advertising player worth mentioning while generating $543 million in free cash flow over the past four quarters.
Although there are brighter days ahead, remember that the advertising market is still in a downturn. While most of its competitors are lagging behind, Trade Desk is already starting to return to business as usual. We can't wait to see what this innovative marketing expert does once the digital cookie jar is gone. This stock is expensive at a trailing P/E of 230 times sales and 21 times sales, and for good reason. You should consider buying some shares before the stock price rises any further.
Is Netflix stock the best it's ever been?
Nicholas Rossolillo (Netflix): For years I sat on the sidelines, Netflix (NFLX -0.61%) Party from afar. Part of the reason was discomfort with the company's in-house production strategy. Just over a decade ago, Netflix was struggling to create original content and began using debt to finance its own TV shows and movies (tower on the sand (first entered the market in 2013). Much of the content has a limited shelf life, and I didn't know what it would be like to create it with long-term debt.
It also influenced my decision to quit Netflix. Walt Disney Since it was in my portfolio, I thought I was already sitting on a long-term winner in the media and entertainment industry. As it turns out, there aren't that many. I recently started watching House of Mouse (and House of Marvel, Star Warsmaking things even more confusing), reallocated much of the revenue to Netflix.
But why buy Netflix now? After all, Netflix, which has been on a roll for the past year as the leader in TV streaming, now has a market cap of nearly $260 billion (much bigger than Disney). However, this positive momentum seems likely to continue.
As you know, Netflix has turned a corner in recent years after using debt to fund years' worth of content and steadily gaining millions of fixed subscribers in the process. . The company is currently profitable on every metric, both in GAAP net income. and Based on free cash flow. Previously, I was skeptical, especially about negative free cash flow. This is because it reflects the outflow of funds into current production funds. However, GAAP net income was positive because this profit metric amortizes video content costs over time.
Indeed, the recent strong rise in free cash flow will slow in 2024, as Netflix ramps up production in the U.S. again after efforts were hampered by the writers and actors strike in 2023. Nevertheless, the trend is very clear. Netflix has grown to become a highly profitable media business, and it looks like it has a long road ahead of it. Building a digital advertising business, expanding to more places around the world, and gradually expanding its reach with more content (now self-funded) all help Netflix make things more It is a tool you can take to advance to greater heights.
None of this is groundbreaking insight. Many investors have known this for years, and it's reflected in the premium valuation (approximately 50x trailing 12-month earnings per share, and 35x based on 2024 earnings estimates). Masu. But with Netflix now a highly profitable company, I'm finally ready to jump on the bandwagon and hold for the long term, as good times may just be beginning for shareholders.