3 Streaming Stocks Threatened by Rising Cancellations

It turns out that running a profitable video streaming service isn’t as simple as Netflix (NASDAQ:NFLX) makes it appear.

The industry leader reported first-quarter revenue of $9.4 billion, generating net income of $2.3 billion. Operating margins of 28% are gold. These are numbers the competition can only dream of.

Instead, the landscape is increasingly littered with services that launched during the Covid lockdown, when it was easy to attract subscribers. Now that out-of-home activities are once again the norm, we’re faced with more streaming titles to avoid than to buy. Service cancellations are on the rise.

Charter reports the industry website Antenna Data shows that customers are cutting the cord with streamers at an alarming rate. There were “50.4 million streaming service cancellations in the first three months of the year.” Two years ago, fewer than 28 million subscribers canceled their services, meaning the churn rate is accelerating.

Their greatest hope for recovery lies in free, ad-supported streaming television (FAST). For the first time, Antenna New subscribers to FAST services were higher than for any other option. More than 50% of all gross new subscribers were enrolled in ad-supported plans.

As the streaming landscape rapidly evolves, here are the three streaming stocks to avoid now.

Disney (DIS)

Disney (NYSE:SAY) is on this list because CEO Bob Iger has failed to deliver on his promise to turn the company around by avoiding embroiling it in the culture wars. The entertainment giant’s film and streaming catalog remains steeped in identity politics that turn off large swaths of its fan base. It seems clear that this will have an impact on the entire company.

Disney Inside Out 2 Disney’s success proves that people will flock to a movie that doesn’t preach to them. Yet its films continue to rack up heavy losses, including its once-powerful Marvel franchise. Disney+ streaming shows have also failed to gain traction. Star Wars spin off The Acolyte is the lowest-rated Disney+ streaming show of all time, with a 14% rating on Rotten Tomatoes.

The streaming service was a major contributor to Disney’s $2.6 billion loss last year, though it did post a small profit in May. While Disney has more than 200 million subscribers, those are split between Disney+ and Hulu.

The crown jewel of the Disney empire is its theme parks. Yet investors should ask themselves if entertainment stocks are turning off fans at the box office and on TV, how long will it be before that trickles down to the parks? That’s why Disney is a streaming stock to avoid.

Warner Bros. Discovery (WBD)

AT&T (NYSE:T) saddled Discovery of Warner Bros. (NASDAQ:JMD) with a heavy debt load, making it the next streaming stock to avoid. The streamer reported $39.1 billion in long-term debt at the end of the first quarter and another $3.4 billion in short-term debt. It had less than $3 billion in cash.

Revenue for streaming services HBO and Max was flat year over year, though adjusted profits rose to $80 million on a sharp reduction in selling, general and administrative expenses. The streaming segment, however, had fewer than 100 million subscribers, though 2 million more than a year ago. But executives at all the major studios agree that 200 million subscribers is the threshold that makes a service viable.

“If you want to be a full-service entertainment service with live sporting events and blockbuster movies today, 200 million is a number that can give you the scale and hope for growth over time,” The New York Times quoted Amazon (NASDAQ:AMZN) Amazon Prime CEO Mike Hopkins said. Former Disney CEO Bob Chapek agreed, saying $200 million means “you’re big enough to compete.”

Warner Bros. Discovery’s stock has fallen 37% this year and 45% in the past 12 months. While it has made a small profit on streaming, that’s only when it includes HBO sales to cable channels.

Paramount Global (PARA)

Last on the list of streaming stocks to avoid is Paramount Global (NASDAQ:PARA), which has tried to sell itself to anyone with a wallet. Its stock has fallen 27% this year and is down 33% from its level a year ago.

Paramount Global, which owns the Paramount movie studio, CBS, several cable channels and the Paramount+ streaming service, has failed to gain much traction. Last year, it lost $1.6 billion on streaming revenue. That loss was fueled by its high churn rate, which led to a $1.5 billion decline. Antenna indicates it was 7% in 2023. Paramount+ has 71 million subscribers, with 3.7 million net additions in the first quarter.

Like other streamers, Paramount is seeing revenue growth thanks to stronger FAST numbers. Its ad revenue jumped 31% in the most recent quarter. The company has also been raising prices for its services. Last month, Paramount+ eliminated its $10 tier and created a new $12 tier that also included its Showtime service.

Paramount Global lacks a clear catalyst for growth, which is why it’s a streaming stock to avoid.

As of the date of publication, Rich Duprey held a LONG position in T and WBD stocks. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publishing Guidelines.

As of the date of publication, the responsible editor did not hold (either directly or indirectly) any positions in the securities mentioned in this article.