Netflix, Disney and Roku face difficult year for content streaming

2022 was a difficult year for streaming services, including Netflix, Disney and Roku, as costs spiralled and shares crashed. New reports from analysts indicate that budgets for new TV shows are likely to be radically reduced this year, potentially driving funds out of production budgets.

- Content budgets of streaming companies tipped to grow by only 2% this year, down from 6%

- Netflix’s 45.5% earnings beat and subscription growth suggest it might bounce back

- First Trust S-Network Streaming & Gaming ETF offers exposure to Disney, Netflix and Roku

The Disney [DIS], Netflix [NFLX] and Roku [ROKU] share prices could be rattled even further in 2023 as programme makers pare back budgets to help curb recent losses, according to a new report.

Research group Ampere Analysis expects spending growth on new streaming content to shrink from 6% in 2022 to only 2% this year.

In addition, analysts at Morgan Stanley predict the streaming industry is entering “a new phase” of slower growth and rising costs. The company forecast services will only add half as many subscribers in 2023 as they did in 2021.

Morgan Stanley also estimates that streaming services like Disney, Warner Bros Discovery [WBD], Paramount [PARA] and NBCUniversal (though its analysis did not include Netflix) together lost more than $10bn in operating income last year. 

During 2022, Disney’s share price fell 43.9% – reportedly its biggest annual fall since 1974 – though in the first week of 2023, it rose 8.1%.

The Netflix share price dived 51.1% across 2022 but is up 7% in 2023 so far. Roku, which makes streaming software, saw even greater losses, plummeting 82%, with a modest reprieve of 7.1% growth this year.

Netflix password-sharing crackdown could boost subscriptions

Despite its stock implosion, streaming giant Netflix may be through the worst of the slowdown. For the third quarter (Q3) of 2022, the company beat expectations on top and bottom lines, posting earnings per share of $3.10, 45.5% ahead of the $2.13 consensus estimate, and $7.9bn revenues, just above the $7.8bn forecast by analysts polled by Refinitiv.

Netflix added 2.41 million subscribers during the period, and intends to crack down on users sharing passwords with friends and family this year, which could boost subscription rates. Investors will be watching for its next earnings release on 19 January.

Disney posted its Q4 and FY 2022 results on 8 November. Revenues grew 9% and 23% year-over-year, respectively, though diluted earnings per share (EPS) were down 18.9% to $0.30.

On 5 January, Roku announced that its number of active global accounts reached 70 million, up from 60.1 million in Q4 2021. 

For Q3 ending 2 November, net revenue grew 12% year-over-year, to $761m. Average revenue per user jumped 10% year-over-year to $44.25. Roku is expected to release its Q4 2022 results on 15 February.

Streaming content set to shift gear in future

Over $500bn was wiped off the value market value of leading global media and entertainment companies in 2022.

As rising living costs hit consumers, companies also face the challenges of retaining their subscribers and bringing new customers on board. Meanwhile, rising inflation means their own costs are going up. In December, Disney raised subscriptions by $3 per month.

New shows are an important tool to keep consumers coming back for more. According to entertainment analysis firm Ampere, total spending on content for services like Disney+ and Netflix will still increase – but at a slower rate of 8%, well below the 25% growth of 2022.

Netflix’s recent earnings beat is partly pinned on the draw of popular shows like Stranger Things. But the type of content on offer may change, with lavish dramas and high production values likely to be a victim of rising costs. 

According to Hannah Walsh, research manager at Ampere, “we are already seeing a shift in content commissioning to incorporate a greater volume of cheaper unscripted formats.”

For Ted Sarandos, co-CEO of Netflix, the challenge isn’t merely a matter of money. “It’s: can you get more impact per million dollar spend than anybody else?”

Funds in focus: First Trust S-Network Streaming & Gaming ETF 

The First Trust S-Network Streaming & Gaming ETF [BNGE] offers exposure to streaming stocks, including Netflix, which is the second-biggest holding in the fund behind Chinese media giant Tencent Holdings [0700.HK] and has 5.27% of the portfolio as of 5 January. 

Disney is also a holding in the fund with a 3.77% weighting. The ETF has a relatively modest exposure to Roku stock at a 1.03% weighting. Since a stock split at the start of February 2022, BNGE stock has fallen by 25.6%. The fund also gives exposure to companies in the fields of internet gaming and esports.

As of 5 January, the ProShares NASDAQ-100 Dorsey Wright Momentum ETF [QQQA] has a 5.78% allocation of Netflix stock. The fund tracks 21 firms Dorsey Wright deems to possess the most potential to outperform the market. In the last 12 months, the fund is down by 21.6%.