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With the end of the school year around the corner, the summer movie season is near. Hollywood does all it can to deliver that one blockbuster that can reap profits for years down the road, through its video distribution chain. So, let’s review three companies that are intimately involved with America’s love affair with the movies – Sony, Netflix, and Hollywood Video – and look at the pros and cons of investing in each.
Sony Entertainment Corp. (SNE)
Snapshot: Based in Japan, Sony is one the world’s largest media and consumer electronics conglomerates.
- Likely sure-fire blockbuster in this summer’s release of "Spiderman 2." The first "Spiderman" brought Sony $806.7 million in revenues – the 11th highest grossing film of all time. It wouldn’t surprise anyone if the second edition does just as well if not better.
- Diversified business model gives Sony several established revenue streams, including the fast-growing, big profit margin, High Definition Television (HDTV) and Plasma screen television fields.
- Recognized and trusted brand name makes Sony’s shares one of the most popular Japanese-based stocks.
- Since Sony is based in Japan, investors expose themselves to the risks of the Japanese economy and any rallies in the Yen, which hurts Sony’s profits in Japan.
- With the job market still weak, will consumers have enough disposable cash next holiday season to afford a new big-screen TV?
- What if "Spiderman 2" flops? Not likely, but with any movie company, this is always a risk.
Netflix Inc. (NFLX)
Snapshot: The largest provider of online DVD movie rentals, Netflix boasts more than 1 million subscribers to its video rental by mail service.
- Business model aims at countering Blockbuster and Hollywood Video’s biggest Achilles’ Heel with the public – the dreaded late fee.
- Monthly subscription charge of $20 is building a base of customers that are paying Netflix an ongoing fee and enabling the company to turn a profit for the first time.
- Revenues are expanding at a healthy 78% annual clip. With miniscule debt on its books, Netflix has an excellent chance of turning into a household brand.
- The company’s shares appreciated more than 330% in the past year – how much higher can the shares go before Netflix’ stock needs a breather?
- Stock is trading at a sky-high 333 times earnings and isn’t for the risk-adverse.
- Subscribers may tire of paying the monthly fee and mailing back the DVDs, causing high churn rates.
Hollywood Entertainment Corp. (HLYW)
Snapshot: The parent company for Hollywood Video is the second largest video, DVD, and video game rental chain store in America.
- Company’s Hollywood Video chain is expanding nationwide and taking on Blockbuster mano-a-mano in the video rental space.
- With the new stores comes new business. Hollywood’s revenues jumped 13% to $1.6 billion in the last year. Meanwhile, the shares appear undervalued – trading a miniscule 8 times earnings.
- Products appeal to a diverse customer base with its Game Crazy video game rental, trading, and sales stores located within each Hollywood Video location.
- Can they really compete with Blockbuster, especially with Netflix now in the mix?
- Acquisition offer by a private group means the company won’t be public for much longer. If you decide to buy shares of Hollywood Entertainment, do so only if the price is significantly below what you would be paid when the merger is complete – currently $14 a share.
- Hollywood’s net income dropped 66% as the company anted-up for new store openings and to pay down debt.
The movie business is truly high-risk, high-reward. A blockbuster can bring investors sweet returns, and a flop can cause a Hollywood company’s stock to nose dive. Many movie and video rental companies are highly cyclical in nature, so invest only if you are willing to stomach the risk.
* Price quotes are from April 9, 2004.
Michael Abramowitz is the Media and Distributors Analyst for Weiss Research, Inc. He is also Assistant Managing Editor for Dan Ascani’s Profits Without Borders (ProfitsWithoutBorders.com). To avoid any conflict of interest, he does not personally own shares or receive compensation from any of the companies analyzed above.
© 2008, Young Money Media, LLC. All rights reserved.