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A bruising proxy battle, a complicated probable sale, and an industry-wide hunt for profits amid a much more demanding market will define the upcoming earnings season for major media and tech companies that run the video-entertainment business.
A note this week from Macquarie Equity Research forecasted an “uninspiring” first quarter from the five big media companies (Comcast
The news is far better for Netflix and other tech giants in the video business, in part because they don’t have to deal with those fading legacy divisions.
Netflix Earnings
First up to report is sector leader Netflix
That 2022 earnings call sent shares plummeting from $690 in November 2021 to about $175 the following June. In response, the company launched an ad-supported tier, cracked down on rampant password sharing, further pushed into video games, live events and merchandise, and cut payrolls and other spending.
More recently, Netflix’s long-time film chief, Scott Stuber, departed. That signaled a new approach to feature-length projects away from “more, faster,” to “more about the audience, less about auteurs” under new film chief Dan Lin.
That means fewer blank checks for the Martin Scorseses of the film world, and a pivot to a wider variety of genres and budgets that can appeal to different tranches of Netflix’s vast global subscription base.
It also means less in general, from a staggering pace of up to 70 feature-length films a year to something closer to 30. Netflix’s offerings are further fleshed out as most of the streamer’s still-struggling competitors are again licensing hit films and series from their libraries.
Netflix’s aggressive shifts in approach since 2022 have paid off in the market, as share prices are back near 2021’s stratospheric post-lockdown highs. The streaming giant now has more than 260 million subscribers, and the industry’s lowest churn rate.
A last-minute Macquarie research note issued Wednesday touted the potential for far more subscriber additions thanks to what it calls “paid sharing,” which helped drive nearly 30 million new subscribers in 2023. Netflix executives had previously estimated as many as 100 million accounts were being shared before it began cracking down, “illustrating that this initiative still has room to run in 2024e,” according to Macquarie.
As well, Netflix’s low-cost, high-marging ad-supported tier launched more than a year ago should continue to grow and further drive monetization of the company’s largely saturated U.S. and Canada, raising average revenue per user in its most important market, Macquarie noted in raising its target price for the company from $595 to $685, with an “Outperform” rating.
Unlike the traditional media companies, Netflix executives also haven’t had to manage the alarming decline of profit-generating linear broadcast and cable operations while developing profitable approaches to streaming’s unique challenges.
“We believe the company remains the undisputed leader in streaming TV,” Macquarie wrote.
Comcast And Amazon Earnings
Next week, Comcast and Amazon
Comcast likely will have some reasons for optimism, expecting a big boost in ad revenues from the presidential elections and this summer’s Olympics in Paris, which subsidiaries NBC, streaming service Peacock and its cable networks will be carrying wall-to-wall. Comcast is rolling out a shared broadband streaming hardware platform, Xumo, with Charter Spectrum, which may provide some stickiness with cable subscribers, perhaps slowing cord cutting.
Also of intense interest: How many of the 3 million Peacock subscribers who joined up in January to watch an NFL streaming-only playoff game have stuck around after that first month’s subscription payment? Both Peacock and Amazon have committed nine-figure sums for an additional streaming-only game next year.
But there are reasons for concern, too. Macquarie analysts Tim Nollen and Ross Compton wrote that Comcast revenue and earnings before interest, taxes, depreciation and amortization, a key measure of profitability, are “stagnating,” with a .4% decline expected for Q1, and only 1% growth expected for the entire year.
The biggest challenge is to Comcast’s core business of providing wired broadband and cable access. Mobile companies’ fixed wireless services are increasingly available, and provide a reasonably priced alternative. Companies such as T-Mobile are advertising heavily and grabbing market share, with fixed wireless as a delivery mechanism up from 1% to 7% in just two years, Macquarie noted.
“Comcast also faces tough comps in film and parks,” Nollen and Compton wrote, remaining “Neutral” (a Hold equivalent) on a target price of $43.
For Amazon, its Prime Video unit is a small but highly visible part of the $1.9 trillion company, but it will be closely watched for progress with its recent default conversion of tens of millions of subscribers into an ad-supported tier.
In a separate note last week, Nollen and Compton pointed to a Digiday story suggesting that, with most subscribers unlikely to pay $3 more a month for ad-free shows, the auto-conversion expanded the industry-wide inventory of ad impressions by a remarkable 8%.
More broadly, connected TV platforms are expected to see ad spending grow nearly 13%, according to media buyer Magna.
“We've wondered what impact Prime will have on TV ads in general,” the Macquarie analysts wrote. “...We think a supportive ad backdrop and increased availability of streaming impressions should encourage more CTV ad spending, where programmatic tools can bring efficiency.”
For a company that generated more than $31 billion a year in digital ad revenues (behind only Alphabet and Meta), the Prime Video move could be a substantial source of growth.
Paramount Earnings
On April 29, Paramount Global will report its earnings, though the far bigger question is whether mini-mogul David Ellison and his partners, including father and Oracle founder Larry Ellison, will have concluded a complex deal to acquire control of the company from Shari Redstone.
The soap opera around Paramount’s future has been playing out for months.
Now, Redstone is hoping to sell National Amusements Inc. — through which she owns a majority of Paramount’s controlling shares — to Ellison for a price reported around $2 billion. In turn, Ellison hopes to then merge NAI with the larger Paramount Global, keep it partially public, generate a couple of billions dollars in “synergies,” and unlock much higher multiples of value. Not everyone is optimistic that will work out as claimed.
Other holders of Paramount stock include Warren Buffett and Mario Gabelli, who stand to lose billions from such a deal if it doesn’t work out.
Further complicating the process, Apollo Global Management
All of which may set up a string of very expensive and time-consuming shareholder lawsuits over the Apollo rejection, and certainly will be the most compelling reason to monitor the earnings announcement.
Other questions will center on whether CEO Bob Bakish has been able to adequately stem deep losses around streaming service Paramount+, some $490 million just last quarter, a whopping amount for a company with an $8 billion market capitalization.
But as Nollen and Compton noted, all eyes are on Paramount’s eventual buyer, while they rated the stock “Underperform” (a Sell equivalent) with a target price of $10.
Disney, Fox And Warner Bros. Discovery Earnings
In May, we’ll see earnings from Fox, Disney and Warner Bros. Discovery.
Disney is fresh off a victorious but bruising proxy battle with two activist investors. If anything, the proxy battle further hastened CEO Bob Iger’s many initiatives to re-position Hollywood’s biggest studio for a direct-to-consumer future. It’s paying off; Nollen and Compton estimated that 40% of the company’s media revenues are coming through direct-to-consumer operations, including Disney+ and Hulu, which it now controls completely.
Iger’s moves also included a $60 billion expansion of parks and resorts, a $1.5 billion investment into Epic Games with a Disney-focused Fortnite expansion, and a deal with Charter Spectrum for cable carriage last fall that likely will be the pattern for deals between major cablers and their Hollywood clients going forward. That latter deal likely will add 6 million new Disney+ subscribers through resale by Charter, Macquarie estimated.
Since the last earnings, however, not much new has been announced, other than a joint venture with Asia’s richest man, Reliance Industries’ Mukesh Ambani, that offloads its Star India media holdings to local powerhouse Reliance Industries, and securing TV rights for the College Football Championship’s expanded playoff games for the next several years.
Still to come is the transition for fading cable powerhouse ESPN to direct-to-consumer streaming, and what that may mean for what’s left of the cable TV ecosystem. If Iger shares more on that, expect the news to resonate well beyond Disney’s own share prices. Otherwise, Nollen and Compton remained Neutral on $DIS, with a target price of $104, less than its current market price.
Fox, which reports May 14, has continued to focus on its linear broadcast and cable operations, along with the free, ad-supported Tubi service. On the one hand, the company has avoided some of the disastrous overspending that characterized most Hollywood studios’ streaming ventures. On the other, it’s difficult to see where the company’s growth will come from, for the quarter or the long haul.
“We are unconvinced on a strategy that relies on linear TV, when even sports and news viewership is moving to streaming,” Nollen and Compton wrote, with a Neutral rating and a $30 target price.
Warner Bros. Discovery reports on May 9, and continues to walk a tightrope between its crushing load of $40 billion in outstanding debt, and an opportunity to use free cash flow from rampant spending cuts, shutdowns and sell-offs to drive shareholder value.
So far, though, CEO David Zaslav and CFO
Nollen and Compton were skeptical that the results will be much stronger in this quarter.
The company “has much to prove in 2024, but 1Q will not be a good start,” they wrote. The company just began rolling out streaming service Max internationally, so that initiative won’t make a big dent in this quarter’s subscriber totals. The company is facing stout competition in extremely expensive bidding by numerous companies for the NBA’s next era of video rights.
Though Macquarie rated WBD as Outperform, with a $13 target price, its shares continue to stumble around at about $8 apiece, down nearly 23% in the past three months, and a third of the level that the stock debuted at two years ago.
The only upside: prohibitions against dealmaking in the Reverse Morris Trust used to create WBD have now expired, so Zaslav is free to buy something. Expectations have cooled for such a deal, however, as the market is unlikely to look kindly at anything that adds more to the 3.9x debt-to-asset ratio still dogging the company.
