The rapid evolution of technology has transformed the media and entertainment industry, along with the integration of new disruptors for generating profitable growth across the sector. In light of this, I think it could be wise to keep an eye on entertainment stocks, Spotify Technology S.A. (SPOT), News Corporation (NWSA), and DoubleDown Interactive Co., Ltd. (DDI).
The global movies and entertainment market is expected to expand at a CAGR of 7.2% until 2030. With favorable demographics, changing consumption pattern, a rise in disposable incomes, and the propensity to spend on leisure and entertainment, the entertainment industry is expected to grow. Moreover, the rising popularity of 3D movies that provide audiences with a virtual reality experience is also likely to fuel the market.
Furthermore, mobile and handheld gaming are revolutionizing on-the-go entertainment and shaping the future of interactive experiences. Cloud gaming services are predicted to grow as a result of the rollout of 5G services. By utilizing mobile ubiquity and quick 5G connections, these services are projected to enable smartphone users to enjoy AAA-quality gaming.
Therefore, the cloud gaming market is expected to grow at a CAGR of 22.6% until 2034.
Moreover, the entertainment and media market is expected to grow at a CAGR of 5.1% until 2031. The growth can be attributed to the adoption of subscription models, live events evolution, podcasting growth, interactive and immersive content. Also, the entertainment industry is undergoing a transformation due to recent technological advancements including wireless, mobile, digitization, consumer analytics and social media platforms.
With these favorable trends in mind, let's delve into the fundamentals of the three best entertainment stock picks mentioned above.
Spotify Technology S.A. (SPOT)
Based in Luxembourg, Luxembourg, SPOT operates as a global audio streaming service with two segments: Premium (ad-free access to music and podcasts) and Ad-Supported (access with ads). The company also provides support services such as sales, distribution, and marketing.
SPOT’s trailing-12-month cash from operations of 750.72M is 143.9% higher than the industry average of 307.76M, while its trailing-12-month asset turnover ratio of 1.66x is 235.4% higher than the industry average of 0.49x.
SPOT’s revenue for the fiscal third quarter ended September 30, 2023 increased 10.5% year-over-year to €3.36 billion ($3.63 billion). Its gross profit increased 18 % year-over-year to €885 million ($956.68 million). Its net income attributable to owners of the parent came in at €65 million ($70.26 million), compared to a loss of €70.26 million ($75.95 million) in the previous-year quarter. Also, its earnings per share came in at €0.33, compared to negative €0.86 in the previous-year quarter.
SPOT’s revenue is expected to grow 17.2% year-over-year to $16.70 billion for the fiscal year ending December 2024. Its EPS is expected to be $3.85 for the same year.
Shares of SPOT increased 103.7% over the past year to close the last trading session at $245.09.
SPOT’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Sentiment and a B in Growth. Within the B-rated Entertainment - Radio industry, it is ranked first out of 5 stocks.
Beyond what is stated above, we’ve also rated SPOT for Value, Momentum, Stability, and Quality. Get all SPOT ratings here.
News Corporation (NWSA)
NWSA is a media and information services company that creates and distributes authoritative and engaging content, and other products and services for consumers and businesses worldwide. It operates in six segments: Digital Real Estate Services; Subscription Video Services; Dow Jones; Book Publishing; News Media; and Other.
NWSA’s trailing-12-month CAPEX/Sales and asset turnover ratio of 5.20% and 0.59x are 25.7% and 20.1% higher than the respective industry averages of 4.14% and 0.49x.
NWSA’s total revenues increased 2.8% year-over-year to $2.59 billion in the fiscal second quarter that ended December 31, 2023. Its net income came to $183 million, up 94.7% year-over-year. Net income attributable to NWSA stockholders per share increased 125% year-over-year to $0.27.
Street expects NWSA’s revenue for the fiscal third quarter ending March 2024 to increase marginally year-over-year to $2.47 billion. Its EPS is expected to increase 44.4% year-over-year to $0.13. Moreover, it has surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has surged 26.7% to close the last trading session at $26.08.
It’s no surprise that NWSA has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has a B grade for Sentiment and Growth. Within the Entertainment - Media Producers industry, it is ranked first out of 11 stocks.
In addition to the POWR Ratings stated above, one can access NWSA's ratings for Quality, Stability, Momentum, and Value here.
DoubleDown Interactive Co., Ltd. (DDI)
DDI engages in the development and publishing of and web-based casual games and mobile applications in South Korea. The company offers DoubleDown Casino, DoubleDown Classic, DoubleDown Fort Knox, and Undead World: Hero Survival games.
DDI’s trailing-12-month EBIT margin of 38.27% is 349.2% higher than the industry average of 8.52%. The stock’s trailing-12-month gross profit margin of 67.92% is 38% higher than the industry average of 49.22%.
In the fiscal fourth quarter, which ended on December 31, 2023, DDI’s revenues grew 9.1% year-over-year to $83.10 million and its adjusted EBITDA grew 46.6% from the prior-year quarter to $36.20 million. Moreover, the company’s net income and EPS amounted to $25.45 million and $10.27, compared to loss of $194.42 million and negative $78.47, respectively.
The consensus revenue estimate of $82.30 million for the fiscal first quarter ending March 2024 reflects a 6.1% year-over-year improvement. Its EPS is expected to be $0.48 for the same quarter. Moreover, it has surpassed the consensus EPS estimates in three of the trailing four quarters.
DDI’s shares have surged 56.1% over the past three months to close the last trading session at $12.99.
DDI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade in Sentiment and a B in Growth, Value, and Quality. It is ranked first out of 18 stocks in the B-rated Entertainment - Toys & Video Games industry.
Click here to see the other ratings of DDI (Momentum and Stability).
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
SPOT shares were trading at $247.17 per share on Thursday afternoon, up $2.08 (+0.85%). Year-to-date, SPOT has gained 31.54%, versus a 6.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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