Macquarie media tech analyst Tim Nollen has lowered his stock price targets for Walt Disney, Warner Bros. Discovery, Paramount and Fox Corp., citing weak ad markets and elusive streaming profitability.
Nollen is the latest Wall Street watcher to weigh in as TV advertising budgets fall while marketers trim costs amid recessionary and inflation risks, and forecasts for revenue growth among U.S. media stocks are cut. The expert trimmed his price target for Disney to $110 from $120, while leaving the studio’s stock rating at “outperform.”
The media analyst sees Disney’s stock recovering if newly reinstalled CEO Bob Iger makes good on his profitability plan for Disney+ and the studio’s other streaming platforms. And those plans may involve Disney+ with ads as a new revenue stream.
“We think the lower priced ad supported tier will lure in price- sensitive viewers (crucial to getting to the management guided 135 -165 million worldwide Disney+ subs in 2024, plus up to 80 million Disney+Hotstar subs), will help resist churn, and will also provide ARPU (average revenue per-user) expansion with ad dollars to more than make up for the lower monthly subscription price,” Nollen wrote in a Jan. 4 research note. Stock in Walt Disney rose $1.59, or 1.8 percent, to $90.58 in early morning trading on Wednesday.
The Macquarie analyst also cited current ad revenue declines due to the impact of a recession and inflation stretching into 2023 to cut Warner Bros. Discovery price target to $16, from $18, while maintaining an “outperform” rating.
As with Disney’s ESPN, Nollen sees success for Warner Bros. Discovery coming in large part from an NBA broadcast deal renewal for its Turner Sports division, which pays around $1.2 billion annually to feature the pro basketball games. Despite live sports remaining a bright spot for U.S. media players, the Macquarie analyst sees NBA costs jumping at any rate with any new contract.
“The problem is the NBA is likely to demand significant price increases above the $2.6bn annually it gets from ESPN/ABC and TNT … It would not be at all surprising to see the league demand at least a 2x price increase, as the NFL did in its renewal beginning in 2023. And – surprisingly – we calculate WBD can handle this,” Nollen wrote. Stock in Warner Bros. Discovery rose by 45 cents, or nearly 5 percent, to $10.00 in early morning trading.
And Nollen also cited a weak ad market to cut Fox Corp.’s price target to $30, from $32, even as the stock rating remains “neutral.” Here, Fox’s reliance on the pay TV bundle and no video streaming platform other than Fox Nation may no longer be a virtue as ad spending and subscriber counts decline.
“Fox’s dependence on the pay TV bundle has long concerned us, warranting a discounted valuation to peers,” Nollen wrote of Fox’s high revenue exposure to advertising amid any economic downturn. Shares in Fox Corp. were slightly off 11 cents to $30.38 in early morning trading.
Paramount Global also received a stock price target cut, to $15 from $16, on continuing ad market declines, while retaining a “neutral” rating. Nollen points to a major headwind from sharply rising content costs for Paramount, especially as it looks to combine Paramount+ and Showtime later this year.
The Macquarie analyst added profitability remains the biggest issue for Paramount amid peak content investment for the studio’s streaming platforms, “so the near-term trajectory for overall earnings is straight down. Any effort to rein in costs could therefore be taken well by the markets.”
The price cut is the latest in recent days for Paramount. Alan Gould, managing director at Loop Capital Markets, released a research note on Dec. 23 downgrading the Bob Bakish-run conglomerate from “hold” to “sell” with a stock price target of $14. In one of the highlights, the analyst focused on direct-to-consumer (i.e. streaming platform) losses and uncertain guidance from the firm on profitability. “DTC division losses should be $1.8-$1.9 billion this year, almost double last year’s loss. Management has projected losses will peak in 2023, but has not provided a time frame for break-even,” Gould noted.
Shares in Paramount Global also climbed on Wednesday, by 41 cents, or 2.5 percent, to $17.48 in early trading.