Macquarie analyst Tim Nollen covers five big stocks: Walt Disney, Comcast/NBCUniversal, Warner Bros. Discovery, Paramount Global, and Fox Corp. “Ad revenue did not improve versus the first quarter, and cord-cutting intensified,” the media expert highlighted in his Aug. 11 review of the latest Hollywood quarterly earnings season. “Only Disney and Comcast offer long-term earnings growth thanks to direct-to-consumer.”
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If you are already thinking “Ouch!,” wait for his bearish conclusion: “This remains a difficult space in which to invest. We do not recommend any of the five stocks in our coverage.” Indeed, Nollen has an “underperform” rating on Paramount and “neutral” ratings on the remaining stocks.
Cord-cutting, which has led to major impairment charges for the cable networks units that used to be the big profit centers of Hollywood companies, is among the reasons for his lack of excitement.
Nollen noted that pay TV subscribers fell 10.9 percent year-over-year across publicly traded cable, satellite, and telecom operators, or around 8.5 percent when including virtual distributors. “This contributed to linear TV affiliate revenues worsening to -3.9 percent year-over-year at the major network groups,” he concluded.
CFRA Research analyst Kenneth Leon similarly highlighted ongoing big challenges for the entertainment sector in an Aug. 15 report. “There has been a major shift in TV network advertising to social media companies and video streaming and away from linear networks,” the analyst emphasized.
And MoffettNathanson analysts Robert Fishman and Michael Nathanson cut their long-term forecasts for “traditional video” across their entertainment coverage stock universe in late July. The good news: they have “buy” ratings on Disney and Fox, which their colleague Craig Moffett also has on Comcast, while they have “neutral” ratings on Paramount, Warner Bros. Discovery, and Netflix. The bad news: they are more bearish on media and entertainment stocks than in the old days.
“It is a very challenging time to be invested in the media landscape. The old traditional pay TV business model was such a good model that it’s nearly impossible to replicate,” Fishman tells The Hollywood Reporter . “And we are continuing to really understand the limitations around the streaming pivot for most traditional media companies. We do think there are still some winners that can make it to the other side, but it’s becoming clearer that getting to the other side is going to be very challenging for most of the others.”
Once upon a time, the industry had a reliable growth engine and consolidated content offering in the form of the cable bundle that came with 40 percent-plus profit margins and “an ancillary but also highly lucrative side business of theatrical and home video releases buoyed by steadily rising overall consumer spend,” he and Nathanson emphasized in their July sector deep dive. Then the streaming wars began in earnest as Disney+, Paramount+, Max, Peacock and more jumped into the space occupied by Netflix.
That has left Hollywood companies in dire financial straits. “For the first time in most Americans’ lives (the median age in the U.S. is 38.5), media companies have been forced to reckon with a video consumer spending pie that has stopped growing and may even begin to shrink,” the MoffettNathanson experts wrote. The analysts therefore now project that total spending here will decrease at a 0.6 percent CAGR from $143 billion in 2023 to $139 billion in 2028. Nathanson and Fishman’s conclusion: “deflation killed the video star.”
Despite the challenges, Fishman is optimistic that some sector players can do well. “There should still be winners, like Disney,” he tells THR . “Fox is playing a different game, so we think it is going to be a winner. But it’s going to be challenging for the others.”
An Aug. 22 analysis by the MoffettNathanson team of U.S. advertising trends confirmed this view. In it, they analyzed how much success various companies across the sector have had in their attempts to diversify ad revenues away from linear TV and into streaming and other digital spaces. They also looked at the differences in the rate of decline across each company’s linear businesses.
In line with their ratings on these stocks, Disney and Fox are doing better than their peers, the MoffettNathanson analysts concluded. “Disney has been far more successful in building out a portfolio of advertising revenue sources away from linear,” they wrote. “Moreover, Disney’s linear ad revenues have held in relatively well compared to peers thanks to its strong suite of sports content.” Taken together, these factors have driven Disney to grow its total domestic ad revenue by roughly $200 million over the past five years, or 2 percent, they concluded.
Fox is a similar story, with the MoffettNathanson experts highlighting “relatively modest declines in linear ad revenues thanks to its narrow focus on sports and news.” Added the analysts: “In 2024, we expect linear revenues to be down just 8 percent from 2019, a decline that is more than offset by the growth of Tubi into nearly a $1 billion business. We project total 2024 revenues to be up 8 percent versus 2019.”
In contrast, Nollen sees little to like for investors. His take on specific stocks underlines that. Case in point – Paramount: “The question is if a turn to direct-to-consumer (DTC) profitability and yet more cost cuts can stanch the linear declines. The Skydance merger does not seem to answer this,” Nollen wrote.
His takeaway on Warner Bros. Discovery is also bleak: “In 2022, WBD targeted $14 billion in annualized adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2023. We now model $9 billion annualized in 2024/2025/2026. The loss of the NBA rights hurts; we do not see much to like although the stock is cheap.”
How about Disney? “A solid performance and outlook for DTC and sports was overshadowed by a downturn at parks. We think there is still too much uncertainty over ESPN’s DTC launch and [theme] parks’ slowdown and major investments ahead to take a near-term stance.”
Comcast has a mix of challenges, too, according to the analyst, who wrote: “Broadband declines continue and parks have swung negative. Peacock is looking perky around the Olympics and new NBA deal, but still loses money.”
Finally, Nollen shared this, comparatively somewhat less pessimistic, take on Fox: “A growing top line amid sharp declines at peers has been enough to push Fox stock up the past several months. Earnings pressures are the same as others, however.”
With all these challenges, can entertainment conglomerates make their stocks more appealing to investors again and how? Management teams across Hollywood have focused on shoring up their bottom lines via cost cuts and more select content investments.
The goal behind all these efforts is to “right-size” the costs of traditional businesses for the digital age and make streaming profitable. However, the impact of such moves can take time to become visible and felt. Another challenge is that the speed of change and erosion in some key businesses, such as pay TV, has often surprised industry insiders, meaning that they have often ended up seeming to be behind the curve with cost reductions whose benefits have fallen short of updated requirements.
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Finally, there is a risk that cost cuts can only take companies so far before they also have to cut into growth opportunities. Paramount, for example, is working through another round of cost reductions with a target of $500 million in savings and the layoffs of 15 percent of U.S. staff to battle “unacceptable” profit declines. However, analysts have long warned that Paramount may be underinvesting, affecting its ability to grow longer-term.
Leon argued that in the context of Hollywood giants’ streaming strategies and recent cost focus the prisoner’s dilemma is “so fitting” an image. “The prisoner’s dilemma is defined as a paradox in game theory or decision analysis where two individuals act in their own self-interests, which does not end up with the optimal outcome,” the analyst explained. In Hollywood, “the leading incumbents have decided to protect themselves at the expense of hurting performance and shareholder value. Over time, and with steep operating losses in 2022-2023 and modest profits in 2024, each company has begun to pivot away from video streaming subscriber growth to investor-based metrics like better-managed programming and content costs, positive EBITDA, and free cash flow.”
There is no easy solution, many emphasize. “The answer comes back to which companies can give investors the confidence that they can grow in streaming, not just for short- term profitability, but real growth to become a longer-term competitor to Netflix on a global basis,” Fishman tells THR . “If the growth or success in streaming is not big enough to offset increasing declines in the linear TV business, then from a total company standpoint, you are still not able to actually grow. So what investors are very focused on is not just what one segment is doing, but what the total company will look like.”
M&A has also often been cited as a possible remedy. More scale to compete with tech giants with deep pockets for content and talent and the chance to reduce overlapping operations are key appeals of dealmaking. That said, past deals and suggested combinations have sometimes been seen as giants doubling down on the melting ice floe of the cable networks business.
Case in point: the mega-merger that created WBD, which recently unveiled a massive $9.1 billion goodwill impairment charge to write down the value of its traditional TV networks amid cord-cutting and advertising challenges. Paramount Global similarly took a charge of $5.98 billion for its cable networks unit. Last December, analysts reacted with doubt, some even with concern, to reports that WBD could acquire Paramount. The phrases they used equated a possible deal to catching “a falling knife” or even a “financial death sentence.”
Nollen recently downgraded WBD shares from “outperform” to “neutral” and cut his stock price target from $13 to $9 on the announcement that TNT had lost the battle for a renewal of its NBA rights to Amazon. “Losing these key rights means it now loses a core content asset for both its linear networks and its Max streaming service,” the analyst explained. “The former is bad enough – ad revenues will now drop sharply starting in the fourth quarter of 2025, and bargaining leverage on cable affiliate renewals now falls. But it’s the lost opportunity for the Max streaming service that worries us the most over time. We have viewed Max as a broad and deep streaming service with content spanning the Warner Bros. studio, HBO, and Discovery’s lifestyle networks, plus children’s shows and sports – but Max’s sports offering will now be weaker without the NBA.”
Many experts say that with M&A, it all comes down to what assets they bring together, whether regulators will allow them, how deals are structured, and what they mean for the debt and cash flow profiles of companies.
Bank of America analyst Jessica Reif-Ehrlich argued recently that “alternatives, such as asset sales or mergers could still be utilized to create shareholder value” for WBD.
She is also among some on the Street who believe that one entertainment company or a financial player could become a roll-up vehicle to gobble up cable networks businesses and make them more profitable by taking advantage of increased scale and cost cuts.
She and her Bank of America team suggested WBD as a possible key player in such a scenario. It could spin off all its linear TV assets into a separate company saddled with an estimated $40 billion in debt, allowing the rest of the company, meaning its studios and streaming business, to focus on returning to growth.
The spun-off TV operation could then acquire other linear TV assets across the industry, including from the likes of Walt Disney, Comcast/NBCUniversal, AMC Networks and others, Reif-Ehrlich & Co. argued. “Many other companies are faced with similar dynamics as WBD but struggle to find adequate alternatives as there aren’t many buyers for these secularly declining assets,” they concluded. “As a standalone entity, this Linear Spinco Asset could potentially become a ‘roll-up’ for other similarly distressed assets, likely at attractive valuations.”
Outside of dealmaking, Reif-Ehrlich particularly wants to see execution from WBD and its peers that shows that profitable growth is possible. Concluded the expert: “Given the persistent secular headwinds, coupled with the prospect of losing the NBA, we believe it is imperative for the company to show meaningful progress in studios and DTC profitability to give investors confidence in the ability for the consolidated entity to grow.”
Nollen made a similar point with a focus on Hollywood’s push into streaming. “Second-quarter results underscored that there are winners and losers in video streaming. Netflix is the de facto winner, but which other companies can push forward successfully?” he wrote. “We think the litmus test for streaming companies will be growing EBITDA and not falling short of guidance for enterprise operating cash from operations and free cash flow.”
The CFRA expert even warned: “Video streaming providers that are not very profitable may be running out of time.” He differentiated between the top-tier group, consisting of Google’s YouTube TV, Amazon Prime Video, TikTok TV, Netflix, Apple TV+, and Disney+ with ESPN and Hulu, saying it is “likely to gain market share from viewers and advertisers.”
However, the second-tier group, based on total subscriber figures, includes Comcast’s Peacock,
Paramount+, Warner Bros. Discovery’s Max, and smaller providers. These companies “may find it more challenging to reach material EBITDA and profitability,” Leon cautioned. “We think the second-tier players’ message that both linear and streaming are complementary is over given viewership migration to
streaming from linear networks.”
Some on the Street have expressed hope that streaming bundles could become a driver that makes media and entertainment stocks more investable again.
“Shareholder pressure has sparked the need for select companies to downsize their streaming ambitions and partner with others to survive,” Nollen put the trend into a more defensive context.
But TD Cowen analyst Doug Creutz has touted the Disney+, Hulu, and Max bundle, among others, as a possible turning point for big players and those looking to invest in them. “We view this as an important step in getting media back to being an investable space,” he wrote in a recent report. Both WBD and Disney should enjoy realizing marketing efficiencies and lower churn and have less pressure to maintain the expensive content mill aspect of DTC.”
Concluded Creutz: “We believe the economic advantages of the bundle will push the rest of the media group to announce similar deals.”
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