Market Insights & Analysis from Kramer Capital Research

The Streaming Wars Have One Clear Winner

This wasn’t a great week for several cult favorite stocks.

I’ll discuss a few of them in the Cannabis Corner but first, we need to talk about why Netflix Inc. (NASDAQ:NFLX) spent so much of this week on the defensive. Part of the reason is that the Walt Disney Company (NYSE:DIS) launched its streaming video channel, Disney+, on Nov. 12, and its stock soon thereafter soared as much as 7 percent as people began talking about its new shows.

Netflix, meanwhile, sank 4 percent before recovering its balance. It is clear that Wall Street is convinced that the shift from conventional cable programming to an on-demand video world will have clear winners and losers. There just isn’t room in the American budget to support all the premium channels, whether they come from Disney, AT&T Inc. (NYSE:T) subsidiary HBO or Alphabet Inc. (NASDAQ:GOOG) property YouTube… much less Amazon.com Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL).

Granted, each channel might cost only $4 to $10 a month, but those subscription fees add up. And realistically speaking, even if the dollars are available, there are only so many hours a day every family can spend glued to the screen.

Every hour Disney captures is an hour that Netflix can’t justify as part of its monthly fee. While millions of families will cheerfully flip back and forth, some will look at the annual cost and drop one service or the other.

We know the audience is limited. And Netflix has already admitted that subscribers aren’t loyal enough to pay extra to keep getting the shows they love.

The last fee increase shook the channel’s subscriber retention rates. Anything more will probably start the exodus.

Meanwhile, those other channels beckon. How many services will a family really watch? Streaming video is revolutionary because it finally lets us pay for only the channels we’ll use, but it also ensures that if nobody watches, the channel will find it harder and harder to pay for eye-catching shows.

When the shows find a loyal audience, it’s a virtuous cycle. Otherwise, as Netflix is finding out, the math gets vicious. The company already is spending $3.5 billion more than it takes in to produce its shows.

That’s a big gamble that the investment will pay off. Apple has deep enough pockets to buy Netflix, its audience and its programming slate outright. Disney and Amazon have plenty of other businesses throwing off enough profit to subsidize their shows.

Netflix now lives and dies according to the amount of buzz its shows generate. If I were in CEO Reed Hastings’ seat, I’d be looking for partnerships with other media companies… even if that means entertaining merger offers.

The Real Winner is Clear

But your favorite streaming channel really depends on your favorite shows. It is like rooting for a sports team.

The real winner of the streaming wars is now evident. I took a lot of grief over the summer for backing Roku Inc. (NASDAQ:ROKU) instead of the giants, but since that stock is up 29 percent this week alone, I feel extremely vindicated now.

You should know the argument. I hope you’ve already figured out your strategy on the stock, whether that’s a short-term trading relationship or a buy-and-hold approach for the long haul.

Roku will move just about any streaming channel’s content from the computer to the big-screen television that still serves as the focal point of so many living rooms. With this company’s technology, “internet TV” becomes simply another form of TV entertainment.

Selling the devices is practically a sideshow at this stage. The real commercial engine here is the advertisements and platform fees Roku bundles into its interface.

Think of all the streaming players as channel operators. They’re the new century’s version of CBS, ABC and NBC.

Roku is the cable carrier that supports all the channels and makes money around the menu that helps you flip back and forth. And as we know, cable stocks have made investors extremely wealthy in the past.

There are no real competitors here. While Apple has its TV device, it’s happy to push its shows through Roku as well. Which would you rather use: a gadget that only gets one channel or a remote control that cycles through all the programming available?

I’m thinking Roku will ultimately beat Apple TV in terms of space on the coffee table. If not, Apple is free to buy its much smaller rival and absorb the technology into its own platform.

Roku is the kind of stock I talk about every week in GameChangers. Netflix is not. One has endless growth potential and the ability to soar 29 percent in any given week. The other is Netflix.

Click here to learn about what GameChangers can do for you.

CANNABIS CORNER: BIG WEED STOCKS ARE STILL BROKEN

It has been another rocky week for the biggest stocks in the cannabis space. Aurora Cannabis Inc. (NYSE:ACB) missed its revenue target and Canopy Growth Corp. (NYSE:CGC) barely hit the mark.

Both companies are still growing extremely fast. But at best their sales are expanding at the rate we hoped to see… and in Aurora’s case, there are ominous signs that the business has plateaued for the time being.

The initial “green gold rush” phase is over. It’s no wonder that the stocks have rolled back to 2017 levels, with a full $3.5 billion in market capitalization evaporating this week alone. Long-term shareholders have lost two years simply to end up back at breakeven. Everyone who’s bought in more recently has lost money.

And since these companies cast such a long shadow over the entire industry, their pain is contagious. Wall Street has circled the wagons, and marijuana-specific portfolios are down 13 percent this week.

Are the giants broken? Aurora tipped its hand by announcing that with production leveling off at 150,000 kilograms a year, management has started focusing on cutting costs.

That means growth is no longer the real story here. This stock is now all about achieving more efficient operations and squeezing a profit out of the business its management already has built.

The question is how big a company that profit can support. After all, Aurora only sold 36,000 kilograms of dried plant matter over the past year, so there’s room for revenue to quadruple from here.

However, it costs $127 million a year to keep the greenhouses running and another $325 million to support sales, general overhead and administration. Even if revenue quadruples, Aurora will at best ultimately generate $700 million in annual profit.

That’s healthy cash flow for what is currently a $4 billion company, but it’s also a best-case long-term scenario that assumes stable commodity pricing and enough demand to absorb every gram that comes out of the greenhouse.

Canopy doesn’t see demand even matching supply before June. Until then, the growers will keep flooding the market to make their revenue targets and prices will keep falling.

Of course, projections like these are only educated guesswork. We can’t count on them until they materialize.

But when the projection suggests that it’s going to take at least seven months simply for cannabis pricing to reach equilibrium, there is zero reason to jump into these stocks now.

Maybe they’ll find their way to my Turbo Trader Marijuana Millionaire Portfolio by summer. Until then, however, long-term shareholders will have to remain patient and focused.

From what we’ve seen this week, their patience has reached a hard limit. It could be a hard winter for these stocks. I’ve steered clear for a reason.

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Hilary Kramer
Legendary Wall St. trader Hilary Kramer

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