With media companies like Comcast, Apple, and Disney quickly mapping out their answers to Netflix and Prime Video the prices being paid for rights to stream old television programming are surging. In recent weeks HBO paid $425M for the global rights to stream Friends and another $500M for The Big Bang Theory. After losing The Office to NBC (again, $500M), Netflix offered the same $500M for Seinfeld and “won.”
We can question how much hit shows are really worth in this context, as it is essentially impossible for a streaming service or cable channel to pinpoint the ROI for a single series. But one thing is certain; prices for content are strong and getting stronger. With per-episode production costs for new shows now crossing into the ten figures in some cases (whereas $1-$2M used to be considered expensive), it is often cheaper (and less risky) to go with a known quantity and buy rerun rights.
A logical reaction on Wall Street, in the face of such prices being paid, would be for content owners to see their share prices catching a bid. But as has been the case lately, logical moves are being shrugged off and content company stocks have done nothing. Investors would rather focus on money-losing, fast-growing tech companies like Uber, or real estate companies trying to get tech-like valuations (WeWork).
While frustrating for value-oriented investors, it is important to keep in mind that low prices allow these companies to gobble up and retire cheap shares, boosting our stakes with no incremental investment from us. Since popular video content brings in a lot of cash (whether it be from resale agreements, advertising, or affiliate fees) no matter Wall Street’s near-term sentiment levels, longer term things will shake out in our favor.
Companies like AMC Networks and Discovery will continue to grow free cash flow by creating great content, and stock buybacks below intrinsic value will result in per-share profit growing faster than in absolute terms. Since 2015, AMCX’s share count has been cut from 73M to 57M and total revenue is up 20%. DISCK’s share count peaked at 858M in 2010 before falling to just 576M in 2017 (M&A activity has boosted the figure above 700M today but buybacks are just now restarting) as revenue nearly doubled.
Even more impressive, these financial metrics have improved during a time that streaming services and cord cutters were supposed to have killed these businesses. Since 2011, Netflix’s streaming subscriber base has grown from 20M to 60M in the U.S. alone but outside content producers are still doing well, in part by licensing their shows to streaming providers.
The more Wall Street ignores the prices being paid for content, in an ever-increasingly competitive streaming landscape, the more value the companies will be able to create for their investors over the long term. The fact that such an opportunity exists is odd, given the high profile attention large streaming rights deals are getting, but the stock market in recent years seems to be myopic, focusing on revenue growth and collectively shrugging at the real cash cows. Let the stock buybacks continue!
Full Disclosure: The author is long shares of AMCX and DISCK, both personally and on behalf of clients, at the time of writing, but positions may change at any time