Lionsgate, Warner Bros. Discovery and Paramount Global were among the hit Hollywood stocks of the first quarter of 2023, shaking off investor concerns about such industry challenges as record cord-cutting, getting streaming businesses to profitability and economic clouds darkening the advertising outlook, as well as recent stock market volatility due to the collapse of banks. Sports entertainment powerhouse WWE, exhibitor Cinemark, Roku and music streamer Spotify joined them among the top gainers during the first three months of the year.
The drivers behind their outperformance were typically Wall Street experts getting more bullish about companies’ financial outlook and upside, or lack of downside, as well as the potential for deals.
Take Lionsgate, for example, whose shares jumped 100 percent year-to-date. After results for the final quarter of 2022 came in stronger than Wall Street had expected, Macquarie analyst Tim Nollen boosted his stock price target by $1.50 to $10, while maintaining his “neutral” rating. “A good studio content slate and focus on Starz profitability are positive drivers,” he highlighted, also noting a workforce reduction of 10 percent. Beyond May’s next earnings update, he mentioned a planned deal as an upcoming catalyst: “Lionsgate is on track to split into two companies by the end of September, with the goal of setting both up with attractive balance sheets.” Separating Lionsgate’s pay TV and streaming business from its studio operations is seen as making both parts more attractive as takeover targets.
Meanwhile, Warner Bros. Discovery emerged as a Wall Street darling early this year, and the proof is in the stock, which gained 58 percent between the end of 2022 and the end of March. Following cost-cutting challenges after the megamerger of Discovery and AT&T’s WarnerMedia that created the conglomerate and the need to address weaker-than-expected momentum at the former AT&T media assets, CEO David Zaslav and his team are this year focusing on growth opportunities, including a march to streaming profitability and strong free cash flow creation. As a result, a growing list of Wall Street analysts have turned bullish on WBD shares, with experts at Wells Fargo and Wolfe Research recently touting limited downside risk.
Paramount Global, which early this year reported strong streaming subscriber gains for 2022 and posted the biggest full-year film unit profit increase out of all Hollywood conglomerates, has also seen year-to-date stock gains, to the tune of 30 percent. Management has said it is working on getting to streaming profitability while targeting a return to overall earnings growth in 2024. Bank of America analyst Jessica Reif Ehrlich on March 28 upgraded Paramount’s stock from “neutral” to “buy” and boosted her price target by $8 to $32 based on the sum of the value of its assets in a sale scenario. In a report, titled “A Shopping List of Attractive Assets,” Reif Ehrlich wrote: “Paramount has a unique collection of assets that could generate significant buyer interest if put up for sale. In our view, the sale of Paramount’s assets could equate to more value than the public markets are ascribing to the company today.”
Beyond Hollywood conglomerates, one content stock superstar for the year to date has been WWE, which has been engaged in “a review of its strategic alternatives,” including a possible sale. Ahead of its biggest annual showcase WrestleMania 39, taking place at Inglewood’s SoFi Stadium on April 1 and 2, its shares ended up climbing 33 percent through the end of the first quarter amid recurring chatter about a deal, but also creative success that has drawn bigger audiences for its wrestling shows. “WWE’s Raw viewership is up 9 percent year-over-year through March 13, while SmackDown is up 8 percent,” Wells Fargo analyst Steven Cahall wrote in a March 29 note to investors. “SmackDown set all-time gate records in nine markets and Raw in seven as of March 6, while premium live events (formerly known as pay-per-views) have been the highest-grossing ever.” Among the potential suitors that have regularly been mentioned are the likes of Endeavor Group, Liberty Media, the Saudi Public Investment Fund and private equity groups.
Cinema stocks, which have been impacted by investor worries amid the streaming age and the COVID pandemic, have also started off the year stronger, led by Cinemark Holdings, which beat fourth-quarter earnings expectations in February and is up 75 percent. The firm’s Latin American circuit is also “catching up with [the] domestic recovery,” Barrington Research’s Jim Goss wrote on March 7 in reaffirming his “outperform” rating on the stock. “We are projecting a continuation of the rebound in box office this year … Cinemark’s balance sheet entering the crisis has been a valuable asset, enabling the company to navigate the crisis and invest in its footprint to return to growth.”
Imax, up 30 percent, and AMC Theatres, up 27 percent, have also gained ground amid improving box office trends, Amazon’s MGM releasing theatrical movies and a recent report that Apple plans to spend a whopping $1 billion per year on producing films that will also be sent to theaters. “Quarter-to-date box office revenue is up 27 percent year-over-year to $1.647 billion and has surpassed our $1.608 billion forecast (+20 percent),” Roth MKM analyst Eric Handler wrote in a March 27 report, but also noted that “the relative performance shows there is still a long road back to normalized levels” seen before the pandemic.
AMC Theatres has also been subject of some deal rumors that boosted the stock late in the quarter. However, Alicia Reese, analyst at Wedbush Securities, shot down suggestions that Amazon could seriously look at acquiring the exhibitor in a March 28 report titled “Amazon Unlikely to Acquire AMC.”
Her arguments: “Amazon does not need 10,000 screens to enter the theater business. Amazon would be better off buying a piece of Cineworld [Regal’s U.K. parent that filed for bankruptcy protection], in our view. Amazon could buy 1,000 screens for $200,000 a screen, or $200 million. Why would Amazon instead choose to buy 10,000 screens for $8 billion?”
Overall, across the wider media and entertainment sector, many stocks outperformed the broader market over the first three months of 2023. Sony Corp.‘s U.S.-listed stock rose 18 percent, Fox Corp. climbed 13 percent and AMC Networks edged up 10.5 percent. Meanwhile, Comcast shares’ 6.5 percent gain was roughly in line with the 7.4 percent gain in the broad-based S&P 500 stock index.
Shares of Walt Disney, which CEO Bob Iger has started refocusing and streamlining with a first round of layoffs this week, have been much-discussed on Wall Street as investors and analysts assess their future trajectory. For example, Antenna estimates recently spoke of a 94 percent uptake of Disney+ price increases and growth in users of the streamer’s advertising-supported plan. “Data supports Iger’s assertion of Disney+’s pricing and content staying power,” concluded Wolfe Research analyst Peter Supino, who has an “outperform” rating on Disney, in a recent report. “If pricing and adoption are coupled with cost efficiencies, we could envision direct-to-consumer breakeven potential earlier in fiscal [year] 2024.” Macquarie’s Tim Nollen also has an “outperform” on the stock, writing March 29: “Moving toward direct-to-consumer profitability is key for Disney stock. Staff layoffs … along with rational decisions on content spending and creative ways to make more money on streaming, can help Disney get there.” Investors so far this year seem to share such optimism as Iger executes his plans. After all, over the course of the first quarter, Disney’s stock gained 12.5 percent.
Underperformers compared to the broader market included the likes of cable giant Charter Communications (up 4.7 percent).
Some sector stocks even lost ground in the first quarter of 2023, such as Dish Network, whose stock fell 33 percent. Among the other decliners were such music and audio names as Warner Music (down 5.6 percent), where new CEO Robert Kyncl in February set his sights on “the next phase of our evolution”; SiriusXM (down 31 percent), which has guided toward net subscriber losses in 2023, recently leading BofA’s Reif Ehrlich to cut her rating from “buy” to “neutral”; and iHeartMedia (down 34 percent), which Ehrlich on Tuesday cut from “neutral” to “underperform.” Highlighted the expert: “Absent a significant re-acceleration in the macro environment or iHeart’s fundamentals, we do not believe iHeart will generate a substantial enough amount of free cash flow to effectively de-lever the balance sheet.”
Bucking that trend was the stock of music streaming giant Spotify, which ended the first quarter 63 percent higher. Wall Street lauded the company for vowing in late January to tighten its belt, with Cahall last month upgrading the stock to “overweight,” writing: “Spotify’s commitment to margin improvement is picking up pace.”
Amid various challenges for the media and entertainment sector, Wall Street will keep a particularly close eye on management commentary on and trends in the ad market and streaming space. “We expect both cyclical and secular pressures to weigh on media company results in 2023,” a team of analysts at SVB MoffettNathanson warned on March 29. While not forecasting an ad recession, the experts cut TV ad estimates for Paramount, WBD, Fox and AMC Networks, driven by the “expected challenges at cable networks in the first quarter and the rest of the year.”
Amid big technology names, first-quarter trends varied significantly. The shares of Facebook parent Meta jumped 70 percent, Roku recovered from 2022 weakness with a 62 percent gain, Apple climbed 32 percent, Amazon 20 percent and Snap rose 26.7 percent.
Netflix, whose shares ended the first quarter 17 percent higher, remains one of the most hotly debated names as it rolls out its ad tier and password-sharing crackdown, expands its gaming ambitions and on Thursday unveiled a restructuring of its film division. “Getting a fair share,” Reif Ehrlich titled a recent report on third-party data about the subscriber momentum of the company, which she rates a “buy.” “The indication of much stronger than anticipated sub data in Canada is an encouraging sign that Netflix’s recent crackdown on password sharing is driving new subs to the service,” she wrote. The efforts to transition to paid password sharing “appear to be creating significant upside to estimates,” Cahall echoed. “We see this is a key part of the long-term Netflix bull case, with first-quarter [earnings] commentary likely a positive catalyst.” And a recent Bloomberg report indicated that the streaming giant’s new ad tier had gained about 1 million users domestically.
But Benchmark analyst Matthew Harrigan continues to be bearish on the streamer. “We remain cautious on Netflix,” he highlighted in a March 21 report. “Advertising initiatives and the nettlesome password sharing crackdown should be average revenue per member [ARM] accretive, but in Benchmark’s view largely position the stock to offset SVOD competitive pressure.” His conclusion: “Netflix is subject to the same difficult streaming market conditions as its peers, even as its operating margins benefit from maturity relative to newer entrants.”
Etan Vlessing contributed to this report.
