The Princes of Digital Media
With growing legions of users watching TV programming on their own schedules, and ultra-high bandwidth soon being pumped to every home, the dawn of digital media convergence will soon arrive, and Yahoo! and Microsoft are well positioned (and priced) to give investors a real bang for their buck.
What’s this convergence thing?
So imagine this: you’re at work and you just realized that you missed your favorite show last night. But you’re not worried. You log onto the web and download last night’s episode in digital quality for under a couple bucks. Within minutes it’s on your media player, and after you get home, you plug your media player into your home TV, and are watching it without the need to sit through all those darn commercials.
Well imagine no more, because within a few years this will all become a reality, but not just with your favorite TV shows. In fact if Yahoo! has its way, millions of the 31 million hours of programming produced annually will be available through their network (1). And Microsoft wants their upcoming Xbox 360 to be the hub of your digital media experience. It plays nice with many digital consumer devices like Apple’s iPod, and you’ll be able to watch DVDs, digital video, listen to music, record TV and play video games all on one network-aware device (2).
With digital cable, on-demand, PVRs, and webcasts, most of the content we watch is digitized and telcos will soon be releasing their next generation fiber-optic networks. That means we’ll be able to download high-quality full length video in real-time from the Web in only a couple years time. According to CNET, Verizon continues to roll out its new Fios fiber system in test communities around the country (3) at speeds of 5x to 10x faster than DSL, and nearly 4x faster than current cable speeds.
Aside from being in the center of digital media in the coming years, Yahoo! and Microsoft have strong core businesses and reasonable price tags that will allow profits to grow and lead to great returns for investors.
Yahoo! (YHOO)
Yahoo! may in fact become the fifth network. Its Yahoo! Media Group is clearly setting up for the long-term and implementing a plan that will allow them to distribute and sell programming to consumers over the Internet. They started building strong connections in Hollywood by hiring media execs from Warner Bros., NBC and CBS. Plus, they set up headquarters in Santa Monica, CA, next to industry titans such as HBO, MTV and Universal. Unlike the less media-savvy Google team, who are also trying to make a media play in video archive searching, Yahoo!’s people are already comfortable on the playing field because they have home team advantage.
Their new IPTV initiative, dubbed Project Lightspeed, will allow Yahoo! to distribute content, but without a way to search all their content, much of it will get lost in the shuffle. That’s why Yahoo! is also building a search engine that will capture rich data about each show and allow that content to be searched, including spoken dialogue. These two core businesses — providing both content and the means for users to access it easily — place Yahoo! in a strong position as a leader in this new industry (1).
Yahoo! is also strong in its core business of Internet services. Because of threats from Google, Yahoo! has recently strengthened services such as mail, photos, and search. By building a network of services that they can bundle together for users, they’re able to drive traffic internally and generate substantial ad revenue while also adding value for their customers. Their ability to drive traffic internally is especially useful when launching new services, such as their re-entry into the media market.
Financially, Yahoo! has generated over US$1 billion in net income over the last two quarters (income statement) and has grown assets while keeping liabilities relatively flat (balance sheet). From an investment perspective their P/E Ratio of 35.36 is about 30% lower than their industry and about 18% higher than the tech sector, making it an attractive buy. Analysts also like Yahoo! Reuters rates Yahoo a low risk investment, and the consensus recommendation is at outperform. I’m looking for this stock to do very well in the next 2-4 years.
Microsoft (MSFT)
Microsoft’s new Xbox 360 is going to be a major improvement in the way computers and digital media are used in the home. Now a consumer device will not only be able to play games, DVDs, and CDs, but also record TV, play radio, store media, and connect to other computers on the home network and stream music and video through an entertainment system. And the Xbox supports plug and play for most media storage devices like Apple’s iPod allowing you to easily play all the movies, music and pictures on the device. Although the price tag is a bit steep (as high as US$400), for those of us who are a little cash or space strapped, this device brings together a lot of bang for the buck. (2)
In their core business, Microsoft continues their relentless growth in existing markets and expansion into new markets. SmartMoney reports that in the next 18 months, four of their seven business divisions will have significant new products and upgrades (4). Additionally, they’re doing some very exciting things in the area of software development which will undoubtedly stem the tide of developers migrating to Java. For example, their .NET Framework continues to offer highly competitive and advanced features that will allow .NET developers (such as myself) to produce much more sophisticated software in much less time.
Financially, Microsoft has got boat loads of cash — over US$40 billion — yes, with a zero and a b (balance sheet). In addition, the company generates about US$3 billion in profits per quarter (income statement). Those are amazing numbers in any terms especially with a P/E ratio like theirs, which is over 20% lower than the industry and the tech sector. Reuters has no risk alerts for the company and overall it’s recommended as outperform. I believe this stock will do especially well in the next 1-3 years.
The Bottom Line
Digital media is coming to a living room near you, and with strong strategies in their core businesses and already attractive prices, Yahoo! and Microsoft’s digital media initiatives will mean big profits in the hands of insightful investors.
References
[1] McHugh, Josh. “The Super Network.” Wired Magazine. Sept 2005. Page 107-11. Go to Story
[2] Microsoft. “Xbox 360 Media”. Go to Page
[3] Reardon, Marguerite. “Verizon hits the gas on fiber campaign.” CNET News.com. May 9, 2005. Go to Story
[4] Rendon, Jim. “Microsoft Gets Back in the Saddle.” SmartMoney Magazine. Nov. 2005. Page 32.
4 Comments Add your ownSubscribe
1. Chris V. | November 8th, 2005 at 4:05 pm
Hi Chris,
First, I just want to say that I love this website! You guys are extremely entertaining as novice investors, but nonetheless full of great ideas.
However, I am slightly concerned with your Microsoft recommendations. Understandably, you are expecting great things from MSFT’s new XBox. But do you really think that this will be the spark to ignite Microsoft’s dwindling fire?
Microsoft has been trading between $25 and $30 per share for the past three years. It is typically used by many institutional traders as a liquidity hedge throughout their daily trading activity. (i.e. Traders know that they will be able to buy and sell MSFT shares on a quick and ready basis with minimal, if any, loss affecting their position.) It has become more of a very short-term and liquid savings account for traders throughout their day.
Furthermore, I am not certain how MSFT’s massive cash position would a good thing, particularly from a value investor’s perspective. As an investor yourself, would you rather keep all of your savings under the pillow like my grandmother or put it somewhere that guarantees returns to you and your family (i.e. shareholders).
For the time being, I believe MSFT may not be the wisest investment. Its products have reached a mature stage of their product life cycle and the company has become an idle cash hog, especially in comparison with firms like Apple.
What happened to MSFT’s innovation? I think it is going to take a lot more gasoline to get this fire going again.
Let me know your thoughts!
Chris V.
2. Chris | November 8th, 2005 at 9:00 pm
Chris V,
Thanks for posting and you make some excellent points, and I wish I had time to comment on all of them, but I’d like to talk about one issue in depth — cash. I think that was the most intriguing to me, because I think the others can be justified relatively easily.
So I was thinking, okay, if US$40 billion is too much, then what are other people saving in terms of their size? Apple is a much smaller company, but yet they have US$8 billion in cash + short term investments… is that bad too?
As it turns out, the answers are less than clear, and here’s why. First, Microsoft has a market cap of $280 billion. Second, although most people say Microsoft has $40 billion in cash, they actually mean cash and short term investments. In actuality Microsoft only has $2 billion in cash and cash equivalents, and a whopping $38 billion in short term investments - which has growth.
So how do other companies stack up? Well I looked at Apple, P&G and GE as some good companies in my mind that may have their financial houses in order, and here’s what I found.
GE has a market cap of $360 billion but only $11 billion in cash with no short term investments. This may not sound like a lot by comparison until you learn that they also have $323 billion in Account Receivables, which is money that is owed by third parties. This is money that typically doesn’t collect interest, unlike short term investments.
P&G, which has a market cap of $180 billion, has $6 billion in cash and $1.5 billion in short-term investments, and very little in AR. This seems like a very good mix of all of them. I like P&G as a company and I will probably be talking more about them later on in my writings.
Finally, Apple, which has a $51 billion market cap, has $3.5 billion in cash (more than Microsoft) and $4.5 billion in short-term investments. Interestingly both Apple and Microsoft have similar ratios of “cash” to “market cap”. So why pick on Microsoft and hail Apple?
Obviously, why certain companies have more cash than others is more complicated than numbers on a balance sheet, but if I were trying to figure out what to do with my cash I’d want it in short-term investments like Microsoft is doing so it can at least grow. I’d also like to buy their stock BEFORE they figure out how to spend it! They will spend it, mind you, it’s just a matter of time.
Best!
3. EntelliMediaNet » B&hellip | November 28th, 2006 at 9:45 pm
[…] The Princes of Digital Media on InvestorGeeks Learning and sharing investment knowledge. … 360 to be the hub of your digital media experience. … Xbox 360 Media . Go to Page [3] Reardon, Marguerite. … […]
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