TikTok and artificial intelligence are on the rise. Cord cutting is cutting into linear TV revenues. There are big questions in the advertising market. After warnings from Wall Street about streaming profitability, Hollywood executives are seeking further cost cuts and mergers and asset sales to optimize their asset portfolios.
With media and entertainment stocks going through a tough time, investors are concerned about whether the sector's biggest names can balance declining content spending with subscriber growth and retention to generate sustainable streaming revenue.
As a result, the stock prices of many entertainment giants have become a “show me the story” trend, with a cautious Wall Street wanting evidence that the decline of traditional media businesses can be halted or reversed, and top executives pushing for new business segments and operating models. can work.
As investors shied away from uncertainty, the first half of 2024 brought mixed results for Hollywood stocks. As industry CEOs and their tech colleagues head to Sun Valley, Idaho, for the annual Allen & Co. gathering, also known as the Big Boss Summer Camp, there will likely be plenty of talk about where to go and what to do to put business strategies into action.
A representative example is Paramount Global. Despite its marquee franchises, the studio, which carries a lot of debt, saw its stock price fall significantly in the first half of this year. And that's after deal talks in which controlling shareholder Shari Redstone studied and rejected David Ellison's Skydance Media's best and ultimately failed bid. As a result, the new trio of CEOs running the studio after CEO Bob Bakish was ousted (Chris McCarthy, George Cheeks, and Brian Robbins) convinced employees and investors that Paramount Global could become a growth story again. The studio's shares are down 28% this year as of Thursday.
Warner Bros. Discovery – CEO David Zaslav and his team are also focused on reducing debt and growing revenue from streaming and valuable assets like Warner Bros. and CNN. Harry Potter — was another big loser in the first half of 2024. The giant's CFO, Gunnar Wiedenfels, cited cost cutting as part of its turnaround scenario, and investors were spooked by management's lack of full-year financial guidance after it recently reported first-quarter financials. As of market close, stock price is falling 37% since the beginning of the year.
Even media, entertainment and technology giant Comcast was not immune from a series of daily declines that saw it lose 12% of its market value as it faced demands that its investment in Peacock be returned by the end of 2023. Comcast, a major U.S. cable TV and internet provider, will be hoping the show will get off to a good start when NBC Universal broadcasts the 2024 Summer Olympics in Paris, which begin on July 26.
Of course, investors often get into a wait-and-see mood when they have no idea what the next step is for a broken stock. Take AMC Networks, home to cable networks like AMC and streamers like Shudder. The company's shares fell 52% in the first six months of the year as it faced a difficult advertising market, restructuring costs and other headwinds.
But there was a glimmer of hope in the media stock market. At Walt Disney Co., CEO Bob Iger defeated dissenting shareholders in a proxy fight, and the conglomerate’s latest quarterly results gave investors confidence as streaming profitability for its combined direct-to-consumer businesses of Disney+, Hulu, and ESPN+ neared.
But the stock fell after the earnings report amid questions about the company's theme park business, its struggling linear TV business with declining revenue and overall ratings. Still, Disney shares ended the first half up 12%.
And shares of Fox Corp., which has put the Fox News mogul in the spotlight this election year, are up 13% since the beginning of the year. Investors also supported Warner Bros. We believe the stock will rise due to the launch of sports streaming bundles with Discovery and Walt Disney and the performance of its Tubi platform.
By comparison, the broader S&P 500 stock index is up 15.6% so far in 2024, meaning many big entertainment stocks have lagged.
“The entertainment industry faces numerous challenges, from changing consumer behavior to significant shifts in advertising spending to the deflationary pressures of streaming,” MoffettNathanson analysts wrote in a June 26 report after a visit to Los Angeles. “This has led to a decline in the profitability of existing media companies and the emergence of new, powerful competitors. Now that we are clearly entering the third chapter of the streaming wars, we expect to see industry consolidation, reduced spending on scripted content, increased spending on live sports, and a return to third-party content licensing.”
The trip didn't change their views on large cap stocks, as they reiterated “buy” ratings on Disney and Fox, “sell” ratings on Roku, and “neutral” ratings on Netflix, Paramount, Warner Bros., Discovery, AMC Networks, and Cinemark.
“Fishing for Growth: Balancing New Opportunities and Secular Headwinds” was an apt title for Bank of America analyst Jessica Reif Ehrlich’s June 6 State of Media report. “Media companies are trying to find new areas of growth against long-term headwinds,” she explained.
BofA financial experts highlighted several business areas in the media. “After a period of sustained weakness, there is a return of cautious optimism to advertising markets,” she suggested. “A better outlook for the economy and inflation has led to an improvement in the advertising market since the first quarter. “A sustained recovery depends on the health of consumers.”
Reif Ehrlich also emphasized: “Beneath the surface, we are seeing significant disruption in the advertising market due to the secular decline of linear TV, the rise of AVOD platforms, and the shift to streaming of more sports programming. This trend has been highlighted on the front as presentations move towards digital capabilities. .”
Morgan Stanley analyst Benjamin Swinburne took a deep dive into the state of media and entertainment in a May 29 report titled “Acceleration – Revisiting Our Investment Outlook.” “As we analyze Q1 results and look ahead to the second half of 2024, the pace of disruption in media is accelerating,” he concluded. “In that context, we maintain our ‘Overweight’ rating on Netflix as its strong double-digit revenue growth could extend beyond its paid-share offerings. We see the declines at Disney and Cinemark, both of which are ‘Overweight,’ as opportunities.” He maintained his “Overweight” ratings on Paramount and AMC Networks.
While the industry is “exploring the opportunities presented by the growth of streaming and the decline of traditional pay TV,” Swinburne highlighted several trends. For example, he asked, “Now that ‘peak TV’ is over, can sports inflation continue?” “For now, scripted TV spending appears to be declining, theatrical productions are increasing, and the value of sports rights (at least as evidenced by NBA demand) remains healthy,” the analyst summarized. “Sports spending remains a minority of overall content budgets, supporting, at least conceptually, the likelihood of healthy rights inflation continuing. Over the longer term, we continue to see sports as a uniquely attractive asset class.”
The Morgan Stanley expert also ended on a bullish note, reminding investors that “media is cyclical.” His conclusion is: “As we look at the remainder of 2024, we are generally constructive about the state of the U.S. consumer and advertising markets.”