Lions Gate Entertainment Corp. (USA) (LGF), The Walt Disney Company (DIS), Netflix, Inc. (NFLX): Content Creation Is King, or Is It?

Lions Gate has stuck gold with The Hunger Games series, but this company rolls the dice every time it produces a movie. The closest thing that Lions Gate has for recurring revenue is its arrangement with Paramount Studios and Viacom, Inc. (NASDAQ:VIAB) to create the EPIX pay-per-view company. EPIX then turns around and inks deals with other distributors, like Netflix, to “rent out” the combined libraries of the three partners. Without the Netflix deal, EPIX would be just breaking even over the past two years.

Lions Gate’s future is too uncertain for a conservative investor to have this stock as the lion’s share of their portfolio. Before last quarter’s earnings, the P/E ratio was higher than 90. Today, it is a more reasonable 18, but earnings are all over the board. Lions Gate has gone from $-0.33 per share in the third quarter of last year, to $0.51 per share in the most recent quarter. Next quarter, Lions Gate is expected to earn only $0.09 per share next quarter. How is an investor supposed to sleep at night with their portfolio contingent on a studio pumping out great movies all of the time?

Foolish bottom line

Lions Gate has produced some recent great hits with both the Twilight and Hunger Games series. This has lead to an equally large run-up in the stock price. Considering the company operates exclusively in the content-production industry, I’m going to pass on picking up shares of Lions Gate anytime soon.

A more well diversified company like Disney may not give you a giant pop when it releases the next billion-dollar movie because of its size, but a couple of duds will not be detrimental to its share price, either. Disney’s business model follows Warren Buffett’s first rule of investing more closely:  “Never lose money.” Disney’s diversification can provide shareholders exposure to content creation and value for years to come.

Wes Patoka has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney.

The article Content Creation Is King, or Is It? originally appeared on Fool.com and is written by Wes Patoka.

Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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