Quarterly reports next week from Walt Disney Co, CBS and Viacom will likely highlight increasing competition in video streaming and could spark volatility in the so-called communication services sector, which has outperformed since it was overhauled last year.
The S&P 500 communication services index has increased 20% so far in 2019, beating the S&P 500's 17% gain and all but two of 11 sectors - technology and real estate. That strong performance is in large part thanks to a recovery by Facebook Inc, as investors bet that the world's largest social network will keep growing, even as it faces regulatory hurdles.
June-quarter results from Disney, CBS Corp and Viacom Inc will keep investors fixated on a rising wave of competition in video streaming against market leader Netflix Inc. All those companies fall within the communication services sector.
Netflix's stock has sunk 14% since it reported on July 17 that it unexpectedly lost US subscribers in the second quarter, rattling investors already worried about the upcoming launch of Disney's streaming service.
Disney's family-friendly Disney+, set to launch on November 12 with a slate of new and classic TV shows and movies, is viewed as the most dangerous threat to Netflix. Disney's shares hit a record high on Monday and have surged 28% this year.
"There is an analysis that has been going on among investors, looking at the number of subscribers Netflix has and the growth that Disney's service could put up in the next three or four years, and the huge disparity in the two companies' valuations," said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana.
The recent increase in Disney's shares and decline in Netflix's shows that investors expect Disney to significantly dent Netflix's leadership in streaming, Carlson said.
Disney's stock is trading at 22 times expected earnings, its highest forward earnings valuation since 2004, according to Refinitiv data. Netflix's forward earnings valuation has dipped to 66 from 82 in early July, before its disappointing quarterly report.
Smaller players CBS and sister company Viacom have also built advertising-supported and subscription video services to compete with Netflix, and they are providing original content to other distributors.
Beyond streaming, investors watching Disney's report on Tuesday will focus on its recent run of box office hits, including "The Lion King," which has increased Disney's lead position at the US box office. Disney owns the five-highest grossing movies of 2019, led by "Avengers: Endgame" and "Captain Marvel."
"The Netflix disappointment and the big Disney box office numbers underscore the importance of intellectual property, of ownership of content," said Jack Ablin, chief investment officer at Cresset Wealth Advisors in Chicago. Even though Netflix makes many of its own shows, it still relies on other producers, he said.
Netflix is losing its two most-watched shows in the United States - "Friends" and "The Office" - to upcoming rival services from AT&T Inc and NBC Universal in 2020 and 2021, respectively.
Viacom and CBS, both controlled by the Redstone family's National Amusements Inc, have worked out a management structure that would see Viacom Chief Executive Officer Robert Bakish leading the combined company if a merger deal is reached, sources familiar with the matter said on Friday, removing a major roadblock in talks to recombine the corporations. In addition to looking for potential confirmation of that deal when CBS and Viacom report their results on Thursday, investors will focus on growth in CBS's All Access and Showtime streaming services.
Viacom could also give details about its strategy to sell programming to video streaming services, including its Paramount Television unit's "Jack Ryan" TV series, based on the character created by author Tom Clancy, which premiered last year on Amazon Prime.
Long viewed as stodgy stocks for dividend-oriented investors, the telecom services sector was renamed communication services last September and supercharged with internet heavyweights Alphabet Inc, Facebook, Netflix and Twitter Inc, along with videogame makers. It was the biggest shakeup of the Global Industry Classification Standard, or GICS, since it was created in 1999. It has gained 5% since then, while the S&P 500 is unchanged over the same period.
CBS and Viacom have both gained about 15% in 2019.
Helped by its $71 billion acquisition of 21st Century Fox's assets, Disney is expected by analysts to report a 41% jump in fiscal third-quarter revenue to $21.5 billion, according to Refinitiv data. Analysts on average expect earnings per share of $1.75. Disney's EPS has met or exceeded consensus estimates in six of the past eight quarters.
"My guess is the company will want to focus on content and investors will want to hear more about the streaming strategy," Ablin said.