When a Trend Shifts Like This, You Can Get Rich
Did you see the investing opportunity in the Golden Globe Awards last Sunday?
Not many investors did. It was easy to miss.
It wasn’t the dazzling fashion on the red carpet or the celebrities congratulating each other. What really struck me was a huge signal for money-making in our Technology trend.
Technology is easily our fastest-moving “Unstoppable Trend” – and the one with the most “sub-trends” and offshoots. We’re already doing great on one of those: Human Augmentation. Our target there is tiny Ekso Bionics Holdings Inc. (NYSE:EKSO), which quickly doubled and is still up more than 40% since I released my first report on it – with much more upside ahead.
But what I saw Sunday was a very pronounced shift in a Technology sub-trend that is going to be one of the biggest opportunities of the next 5-10 years. Billions of dollars are getting sucked out of one industry and into a new one.
Sadly, though, most investors are going to make two mistakes:
- They’ll try to hold onto the past (and previous winners) rather than acknowledge the shift; or,
- If they do recognize it, they’ll plow their money into choices where the potential upside is limited because it’s already “baked in,” as the expression goes.
Do this instead…
Invest in the Age of Original Content
In contrast to years past, the biggest winners were NOT the major networks or even the actors themselves but players like Amazon and Netflix, both of whom provide something called “original content.”
Original content is entertainment that’s produced and aired exclusively by entertainment giants (Netflix’s “House of Cards” is one example and “Orange Is The New Black” is another).
Ostensibly entertainment, it’s really a powerful marketing mechanism intended to get customers to rationalize paying their cable or Netflix bills for yet another month.
This stuff isn’t cheap. In fact, Netflix invested a staggering $100 million in creating the first season of “House of Cards” and another $90 million just for the 10-episode miniseries “Marco Polo.” Ultimately, we’re talking about billions of dollars here.
What’s interesting about this is that original content is not just “worth it” for the producers. It’s also incredibly valuable for sites that don’t charge their users anything, like Google or YouTube. That’s because original content draws a larger, more devoted audience which, in turn, helps these sites monetize the users they have.
Netflix and Amazon are leading the way at the moment, but smaller players are already charging hard right behind them including Hulu, Vimeo, and Vevo. Even YouTube (which is now owned by Google), recently said they’re going to start dedicating more resources to their own content creation – and the last time they did that was with a $200 million investment in 2012.
These guys are all investing more and more into creating their own content – and it’s not just winning them Hollywood awards. It’s winning them subscribers and revenue and a big piece of the market share from traditional providers like Comcast.
Just consider: Original content was already proving itself to be a bonanza for Netflix by the end of Q1/2013, when it was reported that the company had won over an additional 2 million paying subscribers, yielding enough revenue to pay back the cost of creating “House of Cards” in just three months.
In Q1/2014, “House of Cards” brought in another 4 million subscribers. And in July 2014, on the heels of a triumphant earnings report that showed a 24% increase in revenue year-over-year, Amazon announced it would double down on original content investing, to the tune of $100 million for that quarter alone.
I think this data – along with the recognition of artistic success at the Golden Globe Awards – signals a changing of the guard. The new model for entertainment is original content.
The Wrong Way to Invest
Now a lot of folks are going to see this shift and say, “Great, I’m going to buy Amazon or Netflix.”
Don’t make that mistake.
Both of these companies have glorious recent pasts, with Netflix Inc. (NasdaqGS:NFLX) more than doubling in value from April 2013-March 2014 while Amazon.com Inc. (NasdaqGS:AMZN) surged 44% in the last three months of 2013 alone. But after delivering very impressive growth in the last two years, they now suffer from lofty expectations that could cause the stocks to plummet even if they continue to report modest growth year-over-year, as is likely to be the case.
I would not touch Amazon – it’s too expensive, and competition from Google and Microsoft – just to name two companies – is eating into their business. Equally worrisome, the company has shown no signs of overcoming the problem of its razor-thin profit margin, as it reported an operating loss of $126 million in Q2/2014 and an alarming $544 million for Q3/2014.
Netflix remains a viable bet, but with a P/E ratio of 85 it’s also expensive. And because of its phenomenal earlier growth, there’s enormous pressure on Netflix to keep delivering, the same phenomenon that dragged down Apple stock in 2013. Just consider: Netflix has lost 35% of its market cap in selloffs since September, despite a quarterly earnings report that showed the company bringing in 980,000 more customers, and earnings that were in line with consensus expectations.
The Better Way to Play Original Content
The true winner hasn’t yet emerged from a fluid field of contenders, but it’s going to look something like the direct distribution model we saw with “The Interview.” That’s not an endorsement of Sony, by the way, as it stumbled upon that style of release completely by accident. In fact, I believe the company is a compelling short for reasons beyond its movie business.
To me, the far more successful play is to make a “picks and shovels” move right now. Like the store owners who sold shovels to scrappy miners and made bank, savvy investors want to align with tiny emerging tech companies that help move the media itself.
Two of my favorites right now include Brightcove Inc. (NasdaqGS:BCOV) and Limelight Networks Inc. (NasdaqGS:LLNW).
Based in Boston, MA, Brightcove is a $250 million company that offers cloud-based solutions for other companies to distribute and publish digital media. It turned profitable for the first time in Q3/2013 – and it’s beaten analysts’ expectations twice in the four quarters since, sending the stock bouncing 14% and 18% in the aftermaths of Q2/2014 and Q3/2014 respectively.
Limelight Networks is a content delivery network company based in Tempe, AZ. The company has seen a flurry of positive earnings estimate revisions, and its 19% uptick in stock price over the last two months indicates that some investors are starting to notice its potential.
While Brightcove is priced around $7.70 per share and Limelight is trading at around $2.80, I believe each could quickly rise to above $8 and $3 respectively.
If a bigger play is more your style, consider SanDisk Corp. (NasdaqGS:SNDK). The company is a global leader in flash memory storage solutions, and is building the large-scale data environment and chipsets going to be used on the devices that display the billions of dollars’ worth of original content you can expect to see flooding the entertainment industry.
Sandisk is currently down more than 15% since early January as investors react to corporate guidance forecasting weaker sales of flash memory storage chips. This blip in sales is mainly a response to weaker smartphone sales, which were unexpectedly poor for the last quarter as Apple and Samsung struggled.
Longer-term though, SanDisk is ideally positioned as Cisco’s prediction of 50 billion interconnected smart devices by the year 2020 comes closer to reality.
I’ll be back later in the week with news on a major market signal that’s already causing justified alarm – but for the wrong reasons.