DirecTV (NASDAQ:DTV) is the largest satellite-TV operator and the second largest pay-TV provider in the United States.  Cable companies have lost thousands of customers over the past few years. However, this trend has not affected DirecTV, primarily due to its better customer service and the exclusivity of its NFL Sunday Ticket package. DirecTV also operates satellite-TV services in Latin America (LatAm), where the company’s subscriber base has tripled in the last six years. Its expansion has been helped by the sustained growth in the region’s middle class segment. As the middle class continues to grow, Pay-TV will gain further acceptance as a consumer staple in the region.
Our price estimate for DirecTV stands at $95, implying a premium of about 6% to the market. However, there are certain triggers and plausible developments that can move the stock significantly in the next couple of years. Specifically, we believe that a rapid erosion of the overall pay-TV subscriber base, introduction of a streaming service and better than expected growth in the LatAm region are some of the catalysts that can trigger stock price changes for better or worse.
- Weekly Pay-TV Notes: AT&T & DirecTV Merge With FCC’s Blessing; Comcast Announces Strong Q2 Results And Declares Dividend
- Why We Believe That The DirecTV-AT&T Merger Is Almost A Done deal
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- How Much Of An Effect Is Cord Cutting Having On Cable Companies?
- How Are DirecTV’s U.S. Operations Trending?
- DirecTV Q1 Earnings: US Subscriber Base Grows; Stronger Dollar Hurts LatAm Operations
Pay-TV Subscriber Losses Accelerate Rapidly (~25% Downside)
Pay-TV market has become saturated over the past few years. Even though total TV households in the U.S. have inched upwards, increasing from 114.2 million  in 2012-13 to 116.3 million  in 2014-15, the number of pay-TV subscribers has remained stagnant at around 100 million for the past few years.  Top pay-TV providers are currently losing a combined 100,000+ subscribers per year, having lost around 105,000  and 125,000  subscribers in 2013 and 2014, respectively. This rate of erosion has allowed the pay-TV providers to remain profitable as the loss of subscribers is more than offset by rising subscription fees. In our base scenario, we believe the pay-TV subscriber base will shrink by 100,000 subscribers every year and just dip below 100 million by the end of our forecast period, resulting in a pay-TV penetration of just under 85%.
However, the rate of erosion of subscriber base could potentially accelerate to a point where the pay-TV industry might lose more than one million subscribers per year. TiVo recently released a white paper which estimates that approximately 1.5 million customers plan to cut the cord of their pay-TV service. The rise of alternative platforms, such as online streaming services, can also hasten the subscriber losses for the pay-TV industry. Streaming giant Netflix already has a thriving subscriber base and other content providers such as Dish Network, Sony, Apple, HBO, CBS, and etc., are also launching their own streaming services. These services will be priced considerably lower than the subscription fees charged by traditional pay-TV providers. This could lead to a mass exodus and the pay-TV market could drop down to 90 million in the next six to seven years, resulting in a pay-TV penetration of around 75%. This turn of events will also have a detrimental effect on the DirecTV’s market share, which could potentially stagnate at around 20%. The company will also not be in a condition to raise prices as it will be competing against cheaper streaming alternatives. All these developments could bring down DirecTV’s price estimate to $71, which would be a 25% correction to our current estimate of $95.
DirecTV Expands Fast In Adjacent Markets (~10% Upside)
Introduction Of Streaming Service
The streaming market is ripe with potential. As mentioned earlier, content providers are increasingly opting to broadcast their programming through the internet. These streaming services are priced according to the amount and demand of content they carry. On the low end of the spectrum, Netflix offers its services at $9 a month while Hulu does so at $8 a month.  On the other end, Sony’s Playstation Vue service is priced at $50-70 and broadcasts around 85 different channels. Other streaming options such as Dish’s Sling TV ($20 monthly for 20 channels) and Apple’s streaming service ($25-$35 monthly for 25 channels) are priced somewhere in between.
DirecTV currently provides a free streaming service called DirecTV Everywhere to its subscribers. The streaming service currently offers 90 channels including CNN, Cartoon Network, Showtime, HBO, FX, TNT etc. DirecTV could potentially convert its streaming service into a paid service and could price it somewhere in the $20-$25/month region based on the richness of its content. Rival pay-TV provider Dish Network’s streaming service Sling TV offers 20 channels including ESPN and drew at least 100,000 sign-ups in its first month.  Keeping this in mind, we believe that DirecTV could potentially have a customer base of around 500,000 by the end of its first year of offering. If this customer base reaches 7 million by the end of our forecast period, it can add $2.3 billion in incremental revenues and $1 billion in incremental gross profits. The streaming service will cannibalize some of DirecTV’s pay-TV subscribers but we expect this loss to be minimal. The additional revenue brought in by the streaming service will push DirecTV’s average revenue per U.S. subscriber higher. In our base assumption, which does not include revenues secured from the streaming service, we believe that average revenue per U.S. subscriber will be around $88.90 in 2015 and will eventually grow to $106.70 by 2021. This figure increases to $89.40 for 2015 and crosses $115.00 in the next six to seven years in our optimistic scenario. Consequently, the introduction of a streaming service will result in a jump of around 5% in the Trefis price estimate.
Better Than Expected Growth In LatAm Region
DirecTV’s LatAm operations have grown exponentially in the last few years. The company’s subscriber base in the region has grown from 3.9 million in 2008 to 12.5 million in 2014.  However, the growth in the customer base slowed down last year and came in just below 8%. Accordingly, we have taken a conservative growth estimate in our base case scenario and we believe that DirecTV’s LatAm subscriber base will not exceed 20 million by 2021.
DirecTV believes that the LatAm region is a relatively untapped market. The company has stated that the region’s lower pay-TV penetration in comparison to the U.S. and other development markets and favorable demographic trends represent an opportunity for continued growth.  DirecTV intends to profitably provide service to value‑focused customers who have the need and desire for affordable access to the company’s brands and service. The services provided are similar to traditional options except they allow customers access to significantly fewer channels, require a self‑installation, and limit the number of set‑top receivers. The company also intends to increase its subscriber base through targeted marketing and distribution strategies, and will leverage its DirecTV U.S. connection to obtain lower cost set‑top receivers. In an optimistic scenario, the company’s targeted strategies could potentially revive growth in the subscriber base and take the figure past 22 million. Additionally, the increase in subscriber base would help in spreading out the costs incurred, improving the company’s margins. The combined effect of better growth in the LatAm region and introduction of a streaming service could lead to a potential upside of around 10% to our price estimate.
View Interactive Institutional Research (Powered by Trefis):Notes:
- MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩] [↩] [↩]
- NIELSEN ESTIMATES 115.6 MILLION TV HOMES IN THE U.S., UP 1.2%, May 7, 2013, Nielsen [↩]
- NIELSEN ESTIMATES 116.3 MILLION TV HOMES IN THE U.S., UP 0.4%, May 5, 2014, Nielsen [↩]
- Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]
- Sony Unveils Pricing, Availability of Vue Online TV Service, March 18, 2015, Wall Street Journal [↩]
- Sling TV’s Web-TV Service Attracts at Least 100,000 Sign-Ups in Its First Month, March 5, 2015, recode.net [↩]
- DirecTV’s SEC Filings [↩]
- Business Strategy – DIRECTV Latin America, DirecTV [↩]