Companies like Netflix, Amazon, and Google (YouTube included) have all spent the last half-decade chipping away at the foundation of cable. It's been a long and arduous process, but the $100 billion oligopoly is finally starting to crumble.
For customers, this is excellent news. The price of basic cable has increased 176% since 1995, and cable companies are among the most hated in the world. Comcast (NASDAQ: CMCSA) even beat out Monsanto, the government’s primary manufacturer of Agent Orange and DDT, in their respective primes.
Many customers have begun to realize they don't actually use the majority of their cable television service and are now seeking out their shows “a la carte.” They're starting to ask, “Why should I have to pay for over 300 channels when I only watch six?” It's a great question, and it's tearing down the cable industry piece by piece.
Researchers believe that if cable subscribers were allowed to choose their stations one by one, or even in smaller groups, the telecom industry would lose $70 billion of revenue, or 50% what they make every year.
The simple fact is that an a-la-carte model for television saves consumers money. No one wants to pay more than they have to, and the savings consumers are beginning to realize are hard to ignore.
Ultimately, content is king, and customers are going to migrate to where their favorite shows are. Cable has managed to survive by holding onto HBO and sports networks exclusively, but its grip on these entities is crumbling.
In October 2014, HBO announced that in 2015, you’ll be able to subscribe to HBO by itself — without a cable subscription. This is a major below to cable, as HBO is the single most valuable entity besides sports on cable. In fact, The New York Post has recently suggested HBO alone is worth more than Fox’s $80 billion bid for all of Time Warner.
The exodus of HBO in 2015 won't be the deathblow, but the demise of cable is coming. It's only a matter of time.
Here are a few statistics to consider:
- 7.6 million households are now "cord cutters." That's 6.5% of homes, compared to 4.5% in 2010.
- 45% of Americans stream television shows at least once a month. That should hit 53% by 2018, according to research from eMarketer.
- 24% of TV viewers ages 18 to 34 (the prime advertising demographic) don't subscribe to any traditional television services.
Below are our top three cable-killing stocks.
Verizon (NYSE: VZ)
You may know Verizon as a wireless phone provider, but it is set to become a bigger player as an Internet provider.
Its FiOS Internet services use fiber-optic technology to deliver a smoother, faster Internet service. Here are some highlights from the company's recent earnings:
- In the third quarter of 2014, Verizon added 162,000 net new FiOS Internet connections and 114,000 net new FiOS Video connections.
- Verizon had totals of 6.5 million FiOS Internet and 5.5 million FiOS Video connections at the end of the third quarter, representing year-over-year increases of 8.8% and 7.0%, respectively.
- FiOS Internet penetration (subscribers as a percentage of potential subscribers) was 40.6% at the end of third quarter 2014 compared with 39.2% at the end of third quarter 2013.
Instead of fighting trends, Verizon has openly acknowledged the antiquated model of cable companies. CEO Lowell McAdam made this apparent at a recent Goldman Sachs conference...
"No one wants to have 300 channels on your wireless device," McAdam said. "And I think everyone understands. It will go to a la carte."
The company will be launching an Internet-based TV service early next year. It has positioned it as similar to Netflix, but with live streaming of content like big-time sporting events.
Plus, Verizon offers not just the Internet access but the whole wireless package, including its robust wireless phone plans. So it could be a one-stop shop for all content-hungry folks who want a la carte access on not only their televisions and tablets but their cell phones as well.
While Comcast is still fighting for its outdated model, Verizon is looking towards the future.
Right now, Verizon is currently trading at around $48 a share, sporting a 52-week low of $45.45 and a 52-week high of $53.66. With an extremely generous 4.5% dividend, Verizon is in an attractive position for a long-term investment.
Google (NASDAQ: GOOG)
Generally speaking, satellite Internet access has been expensive, slow, and unreliable. Conventional satellite networks have to cover large areas with a small number of high-altitude satellites because getting large satellites to high orbit is incredibly expensive
But launching smaller satellites into low altitudes could soon prove a much better strategy. Smaller satellites mean lower deployment costs and ultimately a larger network for better connections.
This plan of launching small, low-orbit satellites is exactly where we believe Internet giant Google is now headed. Based on recent projects and acquisitions, we believe the company is preparing to launch a new kind of Internet service infrastructure that could take down ground-based ISPs like Comcast for good.
In June 2013, Google revealed Project Loon. The aim is to create a network of solar-powered hot-air balloons that would provide free Internet access to nations without solid Internet infrastructure.
The general idea is that these balloons will hang out right at the edge of space, relaying signals to each other and to Internet service providers on the ground.
The project might seem a little far-fetched at first glance, but in reality, this is just like a satellite network a bit closer to earth. Google has already successfully tested the idea by providing connection speeds on par with 3G networks in a small New Zealand town.
Further, each balloon can provide Internet access to an area of about 13,000 square kilometers, which is roughly twice the size of New York City.
A year after revealing Project Loon, Google announced the purchase of satellite company Skybox Imaging for $500 million. Skybox is best known for having built and launched the world's smallest high-resolution imaging satellite that tracks changes happening on the earth's surface.
An obvious benefit of this technology is to service Google Maps and Google Earth, but Google has said these satellites could have other purposes, too. Specifically, Google believes these small satellites could spread wireless Internet much in the way Project Loon would.
In April 2014, Google purchased Titan Aerospace, an Albuquerque-based company manufacturing solar-powered atmospheric satellite drones, or “atmospheric satellites” for short.
Titan's drones travel at altitudes of 20 kilometers and can have satellite-typical functions, such as weather or space photography. According to the company, the drones can fly continuously for up to five years.
Most importantly, though, these drones are capable of bringing wireless Internet connectivity at broadband capacity directly down to earth.
Google isn't the only company with this radical idea, either. Billionaire entrepreneur Elon Musk announced earlier this week that SpaceX is entering into the early stages of a project that will deploy a constellation of nearly 700 small satellites to bring “very low cost” Internet access across the globe.
For cable and Internet service providers like Comcast, these projects would be a major blow. Cable has only been able to remain relevant throughout the last two decades because of two things: infrastructure and content.
With the rise of Internet streaming from Netflix, Amazon, and HBO, we all know the content side is waning. Take away the demand for ground-based infrastructure as well, and you're looking at the end of a $100 billion industry.
CoreSite (NYSE: COR)
CoreSite is a backdoor play on the growing trend of streaming data. The company is a real estate investment trust (REIT) that builds, manages, and leases data center space to companies that do business on the Internet.
These data centers are specialized and secure buildings that house networking, storage, and communications technology infrastructure. They include servers, switches, routers, and fiber-optic transmission equipment.
These buildings provide the power, cooling, and network connectivity to their customers.
CoreSite connects, protects, and ensures the optimal performance and continued operation of mission-critical data and IT infrastructure for enterprises and Internet, private networking, mobility, and cloud service providers.
The company's data centers are located in Los Angeles, the San Francisco Bay and northern Virginia areas, Chicago, Boston, New York City, and Miami.
CoreSite Realty Corporation serves telecommunications carriers, content and media entertainment providers, cloud providers, enterprise customers, financial and educational institutions, and government agencies.
In total, CoreSite operates 15 data centers in eight major communications markets across the United States. It serves more than 750 customers and has a portfolio that totals more than 2.5 million square feet.
Its customers include a long list of content providers and tech companies including: Disney, Netflix, DreamWorks, Microsoft, Facebook, Google, Amazon, Cisco, Comcast, Xerox, Time Warner Cable, Warner Brothers, etc.
The Core Numbers
CoreSite isn't the biggest data center REIT out there, but in terms of growth and valuation, CoreSite is the cream of the crop.
CoreSite has a PEG ratio of 1.26, while competitor Digital Realty has a PEG of 2.52 and DuPont Fabros has a PEG ratio of 7! CoreSite also trades at a price-to-sales (P/S) ratio of 3.5, while the others trade around 4.5x sales.
Perhaps best of all, CoreSite has the lowest debt-to-earnings of any of the data center REITs. That means less of its income has to go to debt service. And CoreSite is in a better position to expand.
Finally, CoreSite has the lowest dividend payout ratio of the data center REITs. That bodes well for increases to the $1.40 a share annual payment.
CoreSite just upped its payment on December 6, 2013. And we are confident another meaningful hike is ahead.
CoreSite estimates it can grow net revenue per square foot by 48% from available capacity and capacity under construction. Add in land it is holding for development, and capacity can grow 98%.
We think CoreSite is good for 25% total returns for the next few years. Of course, that includes the 4.2% dividend that is paid quarterly. That's pretty good.