It is rarely a good idea to bet against Berkshire Hathaway Inc. (NYSE:BRK.A)‘s investment wisdom, but that is just what short-sellers of 12.4 million DIRECTV (NASDAQ:DTV) shares were doing as of the middle of May. Meanwhile, Buffett’s hand-picked investment managers, Ted Weschler and Todd Combs, continue to load up on the satellite television provider. Investors who follow their lead will likely reap large gains, while short-sellers will continue to suffer losses.
Stronghold in Latin America
DirecTV’s domestic business has a poor outlook, which is likely why the stock trades at just 13 times trailing earnings despite high growth overseas. The domestic market is completely saturated, with competitors like DISH Network (NASDAQ:DISH) and even cable companies like Time Warner Cable Inc (NYSE:TWC) putting a low ceiling on DIRECTV (NASDAQ:DTV)’s growth in the United States. The best that the company can hope for is to retain a large portion of its current customers, as adding new ones will be a difficult task.
There are two ways that satellite providers, like DirecTV and DISH, and cable companies, like Time Warner Cable Inc (NYSE:TWC), can generate additional growth in the years ahead: (1) branch out into new businesses within the United States, or (2) reproduce their domestic business internationally. DISH and Time Warner chose the former, while DIRECTV (NASDAQ:DTV) wisely chose the latter.
DISH is a low-cost provider of satellite television, which should prove valuable amid stagnant growth. The company, which focuses on providing low-priced satellite to cost-conscious customers, would benefit from a merger with DirecTV, which earns higher margins via its higher-priced offering. But, DISH has made itself unattractive by diversifying its operations into the notoriously competitive domestic wireless market. As a result, the company is unlikely to produce meaningful growth over the next few years.
Like DISH, Time Warner Cable Inc (NYSE:TWC) is committed to remaining a U.S.-centric business. The company is more diversified than DIRECTV (NASDAQ:DTV) — it offers high-speed Internet and phone service in addition to its cable television offering. But, Time Warner Cable suffers from the same pressure that is hampering DirecTV’s domestic growth; its cable TV business suffers from the increasing number of online options for streaming television in addition to a saturated market, while its phone service business will likely disappear over the next decade due to the smartphone revolution.