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.