Consumer preferences have swiftly evolved in the recent past, shifting to online streaming services and subscription-based entertainment sources. Easier access to the internet has further encouraged the developments in the video and music streaming market.
Given this backdrop, it could be wise to invest in fundamentally strong subscription-based stocks Netflix, Inc. (NFLX), Adobe Inc. (ADBE), and Spotify Technology S.A. (SPOT) for recurring revenue growth in the long run.
The Internet has become an integral part of the modern information society and is reaching every nook of the globe. As per Statista, there were over 5.45 billion internet users worldwide, amounting to 67.1% of the global population as of July 2024. Statistics for social media users also came at a similar level, with 5.17 billion, or 63.7% percent of the world's population contributing.
The increasing internet penetration has also resulted in a transformation in the entertainment industry. Consumers are increasingly leaning towards streaming videos, music, and social media. Also, notably, COVID-19 has significantly contributed to this shift towards subscription-based entertainment sources. The entertainment market is expected to value over $1.23 trillion by 2028.
The video streaming industry is flourishing due to the surging digital media consumption, on-demand streaming options, and the convenience and diversity offered by streaming services. The global video streaming market is expected to grow at a CAGR of 21.5% from 2024 to 2030, reaching $416.84 billion by 2030, driven by blockchain technology and Artificial Intelligence (AI).
Further, a study by Forbes revealed that Americans dedicate a substantial three hours and nine minutes each day to streaming digital media, and 99% of all U.S. households subscribe and pay for a minimum of one of the streaming services. It was mentioned that households pay an average of $46 monthly for streaming services, reflecting the growing demand.
Given these factors, let’s delve deeper into the fundamentals of top subscription-based stocks: NFLX, SPOT, and ADBE.
Netflix, Inc. (NFLX)
NFLX provides entertainment services. The company offers TV series, documentaries, feature films, and games across various genres and languages. It also allows members to receive streaming content through a host of internet-connected devices, including TVs, digital video players, TV set-top boxes, and mobile devices.
NFLX’s trailing-12-month EBIT margin and net income margin of 23.82% and 19.54% are 160 % and 570.9% higher than the respective industry averages of 9.16% and 2.91%. Similarly, the stock’s trailing-12-month ROCE of 31.57% is significantly higher than the industry average of 3.04%.
For the second quarter ended June 30, 2024, NFLX’s revenues increased 16.7% year-over-year to $9.56 billion. Its operating income rose 42.5% from the previous year’s period to $2.60 billion. Also, the company’s net income and EPS stood at $2.15 billion and $4.88, up 44.3% and 48.3% from the prior year’s quarter, respectively.
In addition, the company’s total assets came in at $49.10 billion as of June 30, 2024, compared to $48.73 billion as of December 31, 2023.
Street expects NFLX’s revenue and EPS for the third quarter (ended September 2024) to increase 14.3% and 37.5% year-over-year to $9.76 billion and $5.13, respectively. Furthermore, the company surpassed the consensus revenue estimates in the trailing four quarters.
Shares of NFLX have surged 16.3% over the past six months and 95.7% over the past year to close the last trading session at $705.98.
NFLX’s robust growth prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Quality and a B for Sentiment. NFLX is ranked #17 out of 53 stocks within the B-rated Internet industry.
Click here to access additional ratings of NFLX for Growth, Stability, Value, and Momentum.
Adobe Inc. (ADBE)
ADBE operates as a diversified software company internationally. It operates in three segments: Digital Media; Digital Experience; and Publishing and Advertising. The company offers products, services, and solutions that enable individuals, teams, and enterprises to create, publish, and promote content, and Document Cloud.
On October 14, ADBE expanded its Firefly family of creative, generative AI models to video, with new breakthroughs in its Image, Vector, and Design models and significant momentum in Firefly's adoption by leading brands and enterprises. Enhancements include 4x faster image generation and new capabilities integrated into Photoshop, Illustrator, Adobe Express, and now Premiere Pro.
The Adobe Firefly Video Model expanded ADBE's family of creative, generative AI models and is the first publicly available video model designed to be safe for commercial use.
On the same day, ADBE announced the general availability of the next generation of Frame.io, extending its industry-leading video post-production capabilities to deliver powerful metadata and asset workflows and expanding support to include photos, design, and more.
For the third quarter that ended August 30, 2024, ADBE’s total revenue increased 10.6% year-over-year to $5.41 billion. Its non-GAAP operating income grew 11.1% from the year-ago value to $2.51 billion. In addition, the company’s non-GAAP net income came in at $2.08 billion and $4.65 per share, reflecting growth of 10.8% and 13.7% from the prior year’s quarter, respectively.
For the fourth quarter of fiscal year 2024, ADBE’s total revenue target is between $5.50 billion and $5.55 billion, and its Digital Media segment revenue target is $4.09 billion to $4.12 billion. The company's non-GAAP EPS is targeted at $4.63 - $4.68.
Analysts expect ADBE’s revenue and EPS for the fourth quarter (ending November 2024) to increase 9.8% and 9.4% year-over-year to $5.54 billion and $4.67, respectively. Further, the company has topped the consensus EPS and revenue estimates in all four trailing quarters, which is impressive.
ADBE’s stock has soared 8.1% over the past six months to close the last trading session at $508.03.
ADBE’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
The stock has an A grade for Quality and a B for Sentiment and Stability. Within the Software - Application industry, ADBE is ranked #23 among 131 stocks.
In addition to the POWR Ratings we’ve stated above, we also have ADBE ratings for Momentum, Growth, and Value. Get all ADBE ratings here.
Spotify Technology S.A. (SPOT)
Headquartered in Luxembourg, SPOT provides audio streaming subscription services worldwide. The company operates in Premium and Ad-Supported segments. Its Premium segment offers unlimited online and offline streaming access to its catalog of music and podcasts without commercial breaks to its subscribers.
The trailing-12-month net income margin of SPOT is 3.22%, 10.6% higher than the industry average of 2.91%. Further, the stock’s trailing-12-month ROCE and ROTC of 14.76% and 8.93% are favorable, compared to the industry averages of 3.04% and 3.68%, respectively.
For the second quarter that ended June 30, 2024, SPOT’s revenue increased 9.5% year-over-year to €3.81 billion ($4.15 billion). The company’s gross profit grew 9.4% from the year-ago value to €1.11 billion ($1.21 billion). Its net income and EPS came in at €274 million ($298.59 million) and €1.33 for the quarter, respectively.
Analysts expect SPOT’s EPS for the third quarter (ended September 2024) to increase 385.3% year-over-year to $1.70, and its revenue is estimated to increase 11.5% year-over-year to $3.96 billion for the same quarter. Moreover, the company surpassed the consensus EPS estimates in three of the trailing four quarters.
SPOT’s shares have gained 28.3% over the past six months and 135.6% over the past year to close the last trading session at $372.60.
SPOT’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
SPOT has an A grade for Growth. It also has a B grade for Quality. It has topped among the 3 stocks in the B-rated Entertainment - Radio industry.
Click here to access additional SPOT ratings for Sentiment, Momentum, Value, and Stability.Top of Form
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NFLX shares were trading at $701.70 per share on Wednesday afternoon, down $4.28 (-0.61%). Year-to-date, NFLX has gained 44.12%, versus a 23.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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