A shift by media companies to direct-to-consumer streaming platforms to offset losses from consumers cutting the cord could take time with many unprofitable for a number of years.
The shift and the top companies in the media sector were sized up by an analyst with a focus on the direct-to-consumer and subscription video-on-demand (SVOD) initiatives from the companies.
The Analyst Ratings: Bernstein analyst Laurent Yoon initiated coverage on the following stocks with their listed ratings and price targets.
Walt Disney Co DIS: Outperform, $103
Warner Bros. Discovery Inc WBD: Outperform, $13
Paramount Global Inc PARAPARAA: Underperform, $11
Netflix Inc NFLX: Market Perform, $375
Fox Corp FOXFOXA: Market Perform, $32
Comcast Corporation CMCSA: Market Perform, $46
Charter Communications Inc CHTR: Market Perform, $463
Related Link: Netflix And Chill, Buy Our Merch: Streaming Giant Ready To Make Money With New Consumer Products
The Analyst Takeaways: Cord cutting and the freefall of the linear monetization model make this a compelling time to initiate coverage of media stocks, according to Yoon.
“MediaCos can’t raise affiliate fees fast enough to offset subscriber decline,” Yoon said.
The analyst said legacy media companies are working to reinvent themselves as SVODs.
“Fortunes will be made, fortresses will fall; transition will accelerate, but perhaps growth will stagnate.”
The analyst said legacy media companies were in denial about the threat of direct-to-consumer platforms for too long until Netflix began dominating.
“Eyeballs and dollars began to divert from PayTV to SVOD, and revenues across the value chain started to come under pressure. When it became unavoidable, they all jumped into the DTC games together.”
Yoon said the decline of linear and transition to DTC is being played out for a company like Disney.
“Future growth and profitability are about outpacing linear decline with DTC growth and having scale for profitability.”
Best Investments: Yoon calls Disney the “only credible challenger to Netflix” in the report.
“We are bullish on DIS’s potential transition to DTC at scale once combined with Hulu. We forecast DTC growth to outpace linear decline, supporting overall growth of media,” Yoon said.
The analyst said DTC revenue could surpass linear revenue in 2024 and Disney could become the “undisputed” number two SVOD company.
Yoon said Disney has more to gain with full control of Hulu, when it buys out the remaining one-third stake from Comcast.
A stock like Warner Bros. Discovery may not have as much growth and upside as Disney, but Yoon called it “cheap for what it is.”
“We forecast WBD to generate sufficient cashflow to substantially de-lever.”
The analyst said the company has 80% exposure to legacy and high exposure to linear over direct-to-consumer.
“Alternatively, we believe WBD’s assets are its hedge as WBD is one of the two targets in the sector that could move the needle for any player looking to consolidate.”
The Other Media Stocks: The analyst rates Netflix with a Market Perform and has a price target under where shares stand today. Yoon said Netflix is a good company but could have lower subscriber growth than forecasted.
“We are below consensus on subscriber growth, especially in international markets,” Yoon said.
Paramount is rated Underperform and faces what Yoon calls a “triple whammy” with declines for its linear segment, sub-scale DTC and a poor balance sheet.
“PARA has proven to drive DTC subscriber and revenue growth but without scale in content, churn will stay high and engagement low.”
Fox has a compelling case with loyal viewers of its news and sports assets Yoon said. The analyst is not convinced that Tubi is the company’s Plan B to get streaming subscribers.
“Without an obvious Plan B, it’s reasonable to assume that they are monitoring for a target, but we do not see practical options to pursue.”
Comcast could continue to face challenges in the future according to Yoon. The analyst said a healthy balance sheet could lead to an acquisition in the media space.
For Charter, Yoon said the company doesn’t have a catalyst on the horizon and could be hurt by expensive build-outs for its rural network coverage.
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