Stock Wars: Netflix Vs. Lionsgate

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector with the goal of determining which company is the better investment.

This week, the duel is between two high-profile entertainment industry companies: Netflix Inc. NFLX and Lions Gate Entertainment Corp. (NYSE: LGF-A).

The Case For Netflix: This company was founded in 1997 by tech industry entrepreneurs Marc Randolph and Reed Hastings in Scotts Valley, California, as an online DVD rental store. Within a year of its launch, Randolph and Hastings received an acquisition offer from Amazon.com, Inc. AMZN founder Jeff Bezos, which was rejected. The company weathered the trauma of the dot-com bubble meltdown and competition from Blockbuster LLC, which Netflix sued for patent infringement.

Netflix began to move into original content production in 2006 and streaming in 2007. Over the years, the company de-emphasized the DVD rental side of its operations — although it was never completely shuttered — and played up its streaming endeavors by partnering with major studios while producing its own content. Netflix won its first Emmy Award in 2013 for the series “House of Cards” and branched into the theatrical release side of the business, winning its first Academy Award in 2019 with Alfonso Cuarón’s “Roma.”

Today, Netflix’s streaming entertainment service has more than 209 million paid memberships in over 190 countries.

In the past few months, the company was the center of a brief controversy over protests by transgender activists over jokes made by Dave Chapelle in his Netflix special “Closer,” and it generated a surprise global sensation with the Korean-produced “Squid Game” along with an equally surprising flop when the much-ballyhooed live-action adaptation of the anime series “Cowboy Bebop” was canceled shortly after the premiere of its first season. The company is also generating industry buzz for the next Academy Awards competition for its titles “The Power of the Dog,” “Passing,” “The Hand of God,” “Don’t Look Up,” “The Lost Daughter,” “tick…tick…BOOM!” and “The Harder They Fall.”

In its most recent quarterly earnings report, the third-quarter data published Oct. 19, Netflix recorded $7.5 billion in revenue, a 16% increase from the $6.4 billion level from one year earlier, and a net income of $1.4 billion versus $790 million in the previous year. The third-quarter diluted earnings per share of $3.19 was higher than the $1.74 from the third quarter of 2020.

“After a lighter-than-normal content slate in Q1 and Q2 due to COVID-related production delays in 2020, we are seeing the positive effects of a stronger slate in the second half of the year,” said the company in its shareholders' letter, which noted how Netflix “added 4.4m paid net adds (vs. 2.2m in Q3’20) to end the quarter with 214m paid memberships. We’re very excited to finish the year with what we expect to be our strongest Q4 content offering yet, which shows up as bigger content expense and lower operating margins sequentially.”

Netflix opened for trading on Wednesday at $604.92, which is sandwiched between its’ 52-week range of $478.54 to $700.99.

Related Link: The complete Stock Wars series

The Case For Lionsgate: This company was created in 1997 in Vancouver by Canadian financier Frank Giustra, who embarked on an acquisition spree of small production and distribution companies. Its first hit on the big screen was Peter Greenaway’s critically acclaimed 1997 feature “The Pillow Game” and the company initially focused on smaller films that went into limited theatrical release. The company won its first Academy Award with the 1998 “Affliction” that scored a Best Supporting Actor Oscar for James Coburn.

The company racked up cult favorites including Kevin Smith’s “Dogma” (1999), Mary Harron’s “American Psycho” (2000) and Tyler Perry’s Madea comedies.

Lionsgate had its first major blockbuster in 2004 as a co-producing company for “The Day After Tomorrow” and then snagged its own mega-hit in 2012 with the launch of “The Hunger Games” franchise. The company’s latest endeavor, the biopic “American Underdog: The Kurt Warner Story,” opens in U.S. theaters on Dec. 24.

Over the years, Lionsgate expanded into the home entertainment sector via cable, satellite and pay television and streaming. Its assets include Starz, MoviePlex and the Celestial Tiger Entertainment operations, the latter is an Asia-focused company co-owned with Saban Capital Group and Celestial Pictures. Lionsgate recently completed the acquisition of the 200-title Spyglass Media Group library, which adds to its 17,000-title film and television library.

In its latest quarterly earnings report, the second-quarter data for FY2022, Lionsgate recorded revenue of $887.8 million, up from the previous year’s $745 million, and net income of $3.1 million, up from the previous year’s loss of $21.7 million. Its diluted earnings per share of 3 cents was an improvement from the -8 cents recorded one year before.

"I'm pleased to report another solid financial quarter with strong content generation across our business," said Lionsgate CEO Jon Feltheimer. "Starz drove growth of 1.3 million global streaming subscribers with the strong premieres of three new series in the quarter, our Television Group launched six new series and renewed six current shows, and our Motion Picture Group added to an already robust pipeline with the production starts of nine new films. Importantly, we accomplished this and continued to ramp our content spend while also continuing to generate positive adjusted free cash flow and solid adjusted OIBDA."

Lionsgate shares opened for trading on Wednesday at $15.76, sandwiched between its 52-week range of $9.02 and $21.42.

The Verdict: Last month, Lionsgate surprised many industry observers by signalizing the potential separation of Starz from its studio operations. The quarterly earnings report noted that the company was exploring “potential capital markets alternatives for its Media Networks business (STARZ) including, but not limited to, a full or partial spin-off, split-off, issuance of a tracking stock or other transactions.”

Earlier this week, CNBC quoted an unnamed media industry executive who predicted Roku ROKU will buy Lionsgate’s film and TV production studio in 2022. Roku’s founder and CEO Anthony Wood told CNBC in June that he was spending the majority of his time seeking out strategies to expand his company’s content library.

Content is king in the streaming world and Netflix is at a disadvantage because it lacks the legacy library that competitors such as Walt Disney Co.’s DIS Disney+ and ViacomCBS Inc.'s VIAC Paramount+ enjoy. And while the failure of “Cowboy Bebop” may have been an aberration, it cannot afford more expensive flops of that nature. In contrast, Lionsgate has content galore.

Netflix has a mostly reliable track record for content, although it sometimes comes up short. At the Academy Awards last April, Netflix films scored 36 nominations and the company outpaced the other studios by winning seven Oscars, the most snagged by any studio. However, none of these were for the major categories — the most prominent prizes were the Best Documentary accolade for “My Octopus Teacher” and the Best Cinematography laurel for “Mank.”

Still, Netflix is clearly the stronger of the two companies and by this time next year, Lionsgate could either be a considerably thinner version of its current self or a division of another company. For those seeking stable companies for their portfolio, this Stock Wars duel tilts in favor of Netflix.

Photo: FrankundFrei / Pixabay