May 17, 2022

Charlie Doodle

Unique Art & Entertainment

3 Top Entertainment Stocks to Watch in January

4 min read

The entertainment industry had a rough 2021. With a reopened economy, lockdown orders lifted, and lots of entertainment opportunities available outside the home, some of the best-performing stocks of 2020 posted some of the worst returns last year.

Compared to the S&P 500, which generated 27% returns for the year, more than double its historical average, entertainment stocks were largely a disappointment.

A repeat performance by the broad market index seems difficult to imagine, while the three entertainment stocks below look poised to make up for the lost year and go on to enjoy phenomenal returns. That’s not just over the coming 12 months, but for decades to come. Let’s dive in and see why this trio is among the best entertainment stocks to buy.

Image source: Getty Images.

1. Activision Blizzard

Activision Blizzard (NASDAQ:ATVI) had a year that was the polar opposite of the S&P 500, with its stock losing 27% of its value. The maker of video game franchises that include Call of Duty, Diablo, and World of Warcraft ran into a gale of trouble that started with consumers just not playing video games anywhere as often as they did when they were stuck at home because of COVID-19. It then expanded into accusations of a hostile work environment (for which it’s being sued) and several lead game designers leaving the company, resulting in the suspension of any updates to World of Warcraft.

To say Activision Blizzard is a hot mess at the moment might be an understatement, but each of these is manageable and temporary. That’s evident because rival gaming companies that didn’t have half the troubles Activision did, such as Electronic Arts (NASDAQ:EA), Take-Two Interactive (NASDAQ:TTWO), Zynga (NASDAQ:ZNGA) all posted negative returns last year, some even worse than Activision.

The turnaround could start with its fourth-quarter earnings report, which will include results from the holiday sales season. Its mobile games division, represented by King Entertainment, a fast-growing segment that currently accounts for 30% of its revenue, will be more important.

Assuming management gets its workplace right and investigations into it are concluded or settled (it paid $18 million to the Equal Employment Opportunities Commission to settle some claims), its fundamental business of video games and mobile gaming should carry it much higher.

At less than 18 times next year’s earnings estimates and under 20 times the free cash flow it produces, it offers a discount to historical valuations and remains a leading entertainment stock to buy.

Two people on the couch watch TV.

Image source: Getty Images.

2. Netflix

Video streaming giant Netflix (NASDAQ:NFLX)generated positive returns in 2021, but its 15% gains weren’t nearly enough to match the broad market index. Still, Netflix has grown revenue at or above 20% a year for eight consecutive years. Even though Wall Street has concerns about a potential slowdown amid the rise of competing streaming services, through the first three quarters of 2021, the streamer’s revenue is 20% higher year over year.

That underscores the strength of its original content programming. While there’s a lot of dreck in the menu, the gems it serves up more than offset the losers. Its preeminent industry positioning, though, gave it the power to raise prices and end free trials, and that goes right to Netflix’s bottom line. It spent $17 billion on new content and is still adding millions of new subscribers — it currently has more than 213 million subscribers worldwide). 

There’s still a world of expansion to explore in new markets. It won’t see the same meteoric gains it enjoyed when consumers were locked down in their homes, but people are keeping their subscriptions despite having more out-of-home entertainment activities to choose from. It was up last year, but Netflix will maintain its position atop the streaming market, and its stock will reflect that.

A smiling child surrounded by glowing lights.

Image source: Getty Images.

3. Disney

Disney (NYSE:DIS) was the worst-performing stock on the Dow Jones Industrial Average last year, losing 13% of its value as the market fretted about slowing growth in its Disney+ streaming service. Like Netflix, analysts worry that after two years of substantial gains powered by lockdown fever, at 118 million subscribers, it will be more of a slog going forward.

Disney’s edge is all the levers it has available to pull. Because the world is slowly returning to a sense of normalcy, there’s a better-than-average chance many, if not all of them, will pull the entertainment giant higher.

Disney was an important entertainment company long before its streaming service went live and its unique combination of movie studios, theme parks, and cruise ships all operate independently of one another yet also support each other.

Theme parks are profitable once again, and its other media components, such as Hulu, movies, and more, have regained their footing and are back on track. COVID variant outbreaks are still playing havoc with the cruise industry. Still, the biggest players in the space like Carnival, Royal Caribbean, and Norwegian Cruise Lines are reporting future bookings on par with or exceeding pre-pandemic levels.

Management still expects Disney+ to reach between 230 million to 260 million subscribers by fiscal 2024, so it’s not like people are turning the streaming channel off. 

Disney’s still a little expensive on traditional measurements of value, but its preeminent position atop the entertainment industry makes it worth the premium. Having been so battered last year, it appears that this year the company will bounce back strongly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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