Entertainment stocks that are worth buying are a bit needle in a haystack right now. With costs on the rise, most people are finding cheaper ways to amuse themselves.
That means anyone vying for the shrinking pool of discretionary dollars is up against some stiff competition. Valuation among these companies is markedly lower as investors hunker down for tough times ahead.
But as Warren Buffett famously advised, when something you like is on sale, you stock up. That doesn’t mean all the ailing entertainment stocks are worth picking up. But those that you have bought, or would have bought, at higher valuations are certainly worth a closer look.
So how can you identify whether a beleaguered share is one of the undervalued entertainment stocks? The first step is a look under the hood.
While there’s some room for risk, ideally you’re looking for a company with low debt compared to cash on the balance sheet.
Given that interest rates are at nosebleed levels, masses of debt are only going to make it harder to manoeuvre if customers are hesitant.
The second metric to consider is cash flow. Cash is king, or so they say, and in times of economic trouble, that’s all the truer. Companies with lots of cash swimming around are much better placed to thrive.
Apart from the financial analysis, investors have to consider whether problems at a particular company are short or long term. If the issues are company-specific, proceed with caution. But if it’s market-wide troubles plaguing the firm it could be an opportunity.
There are undeniable growth opportunities in the gaming industry. Keywords (OTC:KYYWF) is in an excellent position to capitalise on them, making it a good pick among undervalued entertainment stocks.
The group provides specialised services for game makers and counts bigwigs like Google and Microsoft as its customers. Keywords benefits from growth in the industry as a whole rather than the popularity of individual titles, which makes it a unique play on the gaming market.
Notably, growth has slowed a bit and is expected to be in the low double digits, which has caused investors to retreat somewhat.
The group’s been working to grow its position as market leader and branching out into new territory like AI, which has pushed the balance sheet to a net debt position. However, it’s still below this year’s forecast cash profits, so unlikely to present much of an issue.
Investors may have to wait through some sluggish growth in the near term, but given how much the valuation has come down in the past year this could be an attractive entry point.
Netflix (NASDAQ:NFLX) has weathered some turbulence recently, and that means the valuation has come down to somewhat more reasonable levels.
The group’s consistently top of the class when it comes to offering first-class content, and it’s trove of customer data means there’s lots of potential for its new ad-supported tier to become a hit among advertisers.
Economic uncertainty is the main weight around Netflix stock’s neck, with many concerned that as people trim their budgets they’ll do away with one of their streaming services.
However, it appears Netflix is more essential than we may have thought. By cracking down on sharing between households, there was some concern that subscriber numbers would dwindle.
But the opposite is true, proving that once people are hooked on Netflix content, they’re relatively sticky customers.
It’s expensive to continue putting out first-class content and the rising wave of competition means Netflix has to continue shelling out or risk being forgotten. That’s creating some risk in the near-term, particularly if economic woes do eventually lead to a subscriber exodus.
While Disney (NYSE:DIS) may be one of the best-known companies on this list of undervalued entertainment stocks, it’s also the one facing the most risk.
The group’s cost cutting efforts haven’t been well received. Declining subscriber numbers in the streaming division have raised red flags.
Still, there’s a lot to like about the House of Mouse. While streaming has hit a bit of a speed bump, there’s still an enviable stable of content to power the service.
Disney has said this part of the business will become profitable by 2024, and making good on that promise would do wonders for the stock.
Beyond the streaming headlines, there’s a solid business underpinning Disney stock. The group’s iconic franchises all come with several revenue streams. Theme parks have also been a bright light for the firm now that covid is well behind us.
The near-term turbulence at Disney has sent investors running for the hills, but the group’s impressive business is likely to thrive longer term, making it a good bet among undervalued entertainment stocks.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.