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Investment Overview for DirecTV (NASDAQ:DTV)
DirecTV is a direct broadcast satellite service based in California, which transmits digital satellite television and audio to households. The company makes money through subscriptions to its satellite TV service provided to consumers in the U.S. and Latin America. DirecTV competes with other satellite service providers such as Dish Network and EchoStar, cable operators such as Comcast and Time Warner Cable, and telcos such as AT&T and Verizon, which offer fiber optic TV service. Additionally, DirecTV makes money through advertising on some of its US channels.
In 2014, AT&T announced an agreement to acquire DirecTV in a stock and cash deal for $95 per share. The purchase price implies a total valuation of $67.1 billion for DirecTV including its debt. The companies expect cost synergies of over $1.6 billion annually within three years of completing the merger, primarily on account of the increased scale of their video subscriber base. The deal is currently pending approval with the regulatory authorities.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of DirecTV's value that present opportunities for upside or downside to the current Trefis price estimate for DirecTV:
US Satellite TV
- DirecTV pay-TV Market Share: We estimate this figure to increase slightly in the coming years and be around 21% by the end of our forecast period as opposed to 20.3% in 2014. However there could be about 10% upside to our price estimate if DirecTV can lift its market share to 23.5% by the end of our forecast period. On the other hand if this figure falls down to 18.5%, there could be downside of similar order.
- SG&A as % of Gross Profits: We estimate this figure to remain around current levels of 42-44%. However, there could be an upside of over 10% to our price estimate if this figure were to fall slowly to 38%. On the other hand, if the company can not handle the costs effectively and this figure were to rise to 48%, there could be downside of a similar order.
For additional details, select a driver above or select a division from the interactive Trefis split for DirecTV at the top of the page.
DirecTV US - Digital TV and HD/DVR
The majority of DirecTV's value comes from its US operations due to the size of DirecTV's U.S. subscriber base (more than 20.3 million in 2014) which is considerably larger than the size of its Latin America subscriber base (just over 12.4 million).
Additionally, DirecTV derives significant value from charges related to HD/DVR equipment rentals in the U.S.. Pricing of DirecTV's services are comparable across both markets (US and Latin America)
- US Pay TV Market Size: The U.S. Pay TV market includes cable providers such as Time Warner Cable, Comcast and Cablevision, satellite providers such as DirecTV and DISH Network, and telecom providers such as AT&T and Verizon that offer fiber optic TV services. Approximately 86% of TV households in the US subscribe to Pay TV services. In comparison, the Pay TV market in DirecTV's Latin American markets represents a fraction of U.S. pay-TV market.
- Pay TV Market Share: DirecTV had 20.3% market share in the U.S. Pay TV market representing 20.35 million DirecTV subscribers by the end of 2014. We forecast that DirecTV's market share will remain relatively flat with total U.S. DirecTV subscribers reaching close to 21.8 million by end of our forecast period. In comparison, we forecast DirecTV subscribers in Latin America growing to about 19.2 million by the end of our forecast period.
Competition rather than Cooperation with Telcos (e.g. AT&T and Verizon)
Before AT&T's U-verse and Verizon's FiOS fiber optic TV services were launched, telcos and satellite providers would team up to provide a bundled TV, Internet and phone service to compete with triple play offerings from cable operators such as Comcast and Time Warner Cable. However, the telcos now compete with satellite providers in certain areas and the level of competition will continue to increase as telcos continue to roll out their TV services.
Fiber-based providers represent one of the fastest-growing sectors in Pay TV market
Several large telcos are upgrading old copper wire lines with fiber optic lines in their markets. The fiber optic lines provide high capacity bandwidth, enabling these companies to offer increased HD content and ability to bundle services.
Fast growth in Latin America
DirecTV is witnessing fast growth in Latin America where its subscriber base grew from 3.3 million in 2007 to 12.47 million in 2014. Interestingly, this high growth is not coming at the expense of ARPU (average revenue per subscriber). Latin American consumers are increasingly adopting advanced services thereby providing room for ARPU growth in local currency terms as well. However, unfavorable currency impact has led to the decline of ARPU in dollar terms in recent years. Additionally, capital expenditures remain on higher side due to rapid expansion phase.
Alternative platform threat
DirecTV in particular, and pay-TV service providers in general, face threat from emerging online video platforms such as Netflix and Hulu. Although these platforms mostly provide content that is not running live on TV, they are now slowly penetrating into pay-TV provider's core turf. Netflix's success with its original content including shows such as House of Cards and Orange Is the New Black is also helping it gain prominence as an alternative to traditional pay-TV service.
Content owners demanding more money
DirectTV competitor Dish Network has had some conflicts with content owners in the past over the issue of their demand for higher carriage fees. Time Warner Cable has also faced such difficulties. DirecTV can not escape from this problem in the long term. Content owners want more fees for their content as advertising sales disperse across several media and DVD sales decline.
Trefis Forecast Rationale for DirecTV Pay TV Market Share
This represents DirecTV's share of the U.S. pay-TV market. Pay-TV market refers to cable TV and satellite TV.
Pay-TV viewers have to subscribe to a connection from one of the operators and pay for the service on a monthly basis. The contracts are usually time bound.
DirecTV is the second largest Pay TV service provider (behind Comcast) and the largest Direct Broadcast Satellite service provider in the U.S. Despite the competition from telcos and cable providers who provide bundled offerings, DirecTV has been able to perform well and gain share in the past. We expect the share to remain stable and climb slightly.
We considered the following factors for this forecast:
- Promotional offers, marketing and relationships with telcos are likely to help
- DirecTV, alongside with its competitor Dish Network, has engaged in aggressive promotional offers such as offering free HD programming in the past. The company is likely to continue to resort to such offers occasionally in the future in order to stay competitive.
- Moreover, DirecTV has also formed distribution partnerships with companies such as AT&T, Verizon, CenturyLink and ViaSat. This enables the company to provide bundled offerings to stay competitive.
- Satellite services are more accessible, especially in rural area
- Unlike cable, satellite connections do not require a fixed cable line to customer premises.
- Consequently, satellite operators cover areas which cable companies do not, as the latter find the cost of laying cable to isolated, remote or sparsely populated communities prohibitive.
- Furthermore, customers can get a satellite connection in their cars or boats and thus stay in touch with TV even when they are traveling or are on a vacation.
- NFL Sunday Ticket is one of the unique value propositions
- NFL Sunday Ticket is a sports package that broadcasts national football league's (NFL) regular season games that are not available on local affiliates. The NFL is one of the most popular domestic sports and maintains substantial viewership. It is consistently one of the most watched programs in the U.S.
- In the U.S., the package is available exclusively to DirecTV, thus giving it a unique advantage and selling point. It is estimated that more than 2 million of DirecTV’s subscribers subscribe to NFL Sunday Ticket package and pay around $300 per season.
Back to Company Overview
- Increasing competition and market saturation
- The U.S. pay-TV market is getting increasingly competitive and saturated. Dish Network's results have improved a great deal and the cable companies seem to be reviving themselves with Comcast being the prime example. This is likely to make it difficult for DirecTV to gain market share.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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