The market is of two minds about our media future.
It's rushed to lavish ostentatious premiums on leading social-media companies such as Facebook Inc. (FB) and Twitter Inc. (TWTR), giving them full credit today for several years’ worth of heroic user growth and a dominant share of incremental advertising dollars.
Yet the market has also flattered traditional large media companies with their highest stock valuations in more than a decade, relative to current and forecast profits — effectively endorsing the prospects for them to continue reaping the benefits of the digital, mobile age.
Is it logical to expect there will be enough consumer attention and advertising demand to sustain both the aggressive growth forecasts of the social networks and the continued flourishing of Old Media? Or are many of the same future advertising dollars being implicitly promised to both?
These questions should form the center of a crucial interrogation of investor assumptions after 2013 — a year in which the full potential of 1.5 billion global smartphones, rise of TV binge-watching, excitement over “native advertising” tailored to individual preferences and endurance of the big-budget movie blockbuster stoked exuberance over a new golden age of media.
Wisdom of the crowd?
One can’t entirely dismiss the chance the market has this roughly correct, pricing in breakneck growth by top social platforms while leaving room for Old Media to thrive as a hyper-connected public continues to consume more information and entertainment.
It’s inarguable the smartphone and tablet revolutions have increased our exposure to media vastly beyond what was common just a few years ago. For decades skeptics have asked, “How much more screen time can the average person spend?” to which Americans have answered, “How much have you got?”
"Multi-screen” behavior — in which folks, say, watch “Breaking Bad” on TV while tweeting about it and keeping one eye on Sunday Night Football on the iPad — is a real thing, making us ever-riper targets for media content and ads.
But for all media outlets to meet profit targets over the long term, it must be a skirmish for finite ad dollars. No one is projecting the global ad-spending pie is due to grow much faster than historical rates. If anything, the promise of mobile and social advertising is to better-target customers – no longer, perhaps, to waste one half or the other of an ad budget, as the old line has it.
The total stock-market value of the top ad-supported Internet-only companies now exceeds $650 billion, with a current collective revenue pool of $80 billion, including subscriber-fed Netflix Inc. (NFLX). A majority of it ($378 billion) comes from Google Inc. (GOOG), the main digital clearinghouse where eyeballs and ad dollars collide. Yet Facebook, at $142 billion, and Twitter, at $31 billion, are about a quarter of this sector, only because they're projected to expand annual ad revenues by 25%-35% and 70%-80% over the next couple of years, respectively – then continue growing far faster than the overall market for years to come.
Traditional-media giants, such as Time Warner Inc. (TWX), Walt Disney Co. (DIS), 21st Century Fox Inc. (FOX) and CBS Inc. (CBS), which rely on the “cable ecosystem” of subscriber fees as well as advertising, command some $400 billion of market value. Together their revenue is around $150 billion – nearly twice that of online media, supporting about 60% of the market value.
Could this be the answer – that the market premium afforded social media stocks relative to their current revenue fully and precisely accounts for their likely advantage in winning future ad dollars versus “legacy” media businesses?
Well, maybe. However, history shows the market gets such things directionally correct but falters when pricing in the pace of change in market-share moves.
And, for the moment, investors in Old Media seem to believe the companies will cede little if any advertising and subscription revenue that can’t be made up somewhere else.
Michael Nathanson, veteran media analyst and partner at research firm MoffettNathanson, notes every large-cap media stock outperformed the market last year and the group has been “on fire for the past few years.” This run came as cheap initial valuations after the bear market were augmented by increased fees collected from pay-TV distributors.
“At this point,” Nathanson says, “valuations no longer suggest a great deal of skepticism, which worries us.”
Old Media, of course, has lived for years with the threat of “cord cutting,” ad-evading time-shifted viewing and TV ratings declines. Yet this has failed to bite deep, in part because the likes of Netflix are spending heavily to build video libraries of new and back-catalog programming, and TV remains an effective way to address a broad audience.
To optimistic investors, it all seems more symbiotic than adversarial. Twitter and TV feed one another, don’t they? Netflix has proven the value of original series Old Media is expert at producing, right? Live sports remains the ultimate “occasion viewing,” and is mostly owned by entrenched media firms.
All true, for now, but it’s unclear how long this happy story will last. One can look back to 2006 to find articles on how Google’s ad-sales platform for newspapers could be the savior of print publishing. It seemed true for a moment. Then it became very, very false.
Television continues to enjoy a “reach premium” – the benefit of still commanding the largest collected pool of viewers, even if that pool is shrinking. Because of this, ad revenue has declined far more slowly than audience size. But as Facebook rolls out video ads to its 1 billion-user “network,” it might finally eat into that premium.
Possibly, adjustments by Old Media are underway and will leave them strong enough to retain their market value.
A social-media bubble?
Might the answer be that social-media stocks are simply dramatically overvalued?
They’re certainly rich. Facebook, at 13-times projected 2014 revenues, is pricier than any company remotely its size. Bullish analysts at UBS extrapolate revenue growth out to $17.4 billion in 2017, from $10.6 billion this year, which would send per-share earnings just above $2 four years out. That means Facebook, now trading around $57.48, fetches 27-times an optimist’s 2017 forecast, in a broad market trading at 15-times this year’s estimates.
As I recently suggested in a column, the market is implicitly anticipating that Facebook match or improve upon Google’s path of stupendous value-creation since its 2004 IPO, which has made it the most successful company of its generation.
Twitter is sending even avid fans scrambling for quantitative justifications for where it trades. At 30-times expected 2014 revenues, the stock at $57 got too rich for the early bull Robert Peck of SunTrust Robinson Humphrey, who says an investor must assume revenue accelerating from 68% next year to 90% in 2016, then 80% in 2017 for attractive upside to remain.
Yet the market could be wrong about what it's willing to pay for social-media darlings such as Facebook, Twitter and LinkedIn Corp. (LNKD), and still be basically correct about the chance they'll dominate future advertising growth. The business can boom nicely without making the stocks great investments at today’s prices.
UBS figures digital ad volume will grow an annualized 12.7% from 2012 levels through 2017, versus 2.5% for the ad market as a whole. If anything, industry trackers are boosting, not moderating, estimates of how fast mobile revenue will balloon compared to other segments; eMarketer now figures mobile-ad spending surged 120% last year, up from prior estimates of 99%.
No doubt much of that growth will come from new local businesses that now find it feasible to run digital campaigns, or will draw from ancillary marketing areas such as infomercials and direct mail. Old Media brands will also surely grab their share of such mobile business via their apps and streamed content.
But there seems a pretty good chance, even given all this, there will be some intense fighting over the slices of a future advertising pie that's unlikely to grow large enough to satisfy all of today's investors.
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