Zacks Industry Outlook Highlights like Netflix, Warner Bros. Discovery, Fox and Roku
For Immediate Release
Chicago, IL – March 1, 2024 – Today, Zacks Equity Research discusses Netflix NFLX, Warner Bros. Discovery WBD, Fox FOXA and Roku ROKU.
Industry: Broadcast Radio & TV
Link: https://www.zacks.com/commentary/2233580/4-broadcast-radio-tv-stocks-to-buy-from-a-challenging-industry
The Zacks Broadcast Radio and Television industry has been suffering from increased cord-cutting despite a spurt in demand for streaming content. However, industry participants like Netflix, Warner Bros. Discovery, Fox and Roku are benefiting from a massive spike in digital content consumption.
Diversified content offerings, which are original, regional, short and suitable for small screens (smartphones and tablets); improved Internet speed and penetration and technological advancement benefit industry participants. As monetization and revenues, in terms of ad spending, continue to be subdued, profit protection and cash management, with greater technology integration, have gained significance and are expected to help these companies drive the top line in the near term.
Industry Description
The Zacks Broadcast Radio and Television industry comprises companies offering entertainment, sports, news, non-fiction and musical content over television, radio and digital media platforms. These companies generate revenues from selling television and radio programs, advertising slots and subscriptions.
These industry players are increasing their spending on research and development and sales and marketing to stay afloat in an era of technological advancements, with increased demand for VR and Internet Radio in an attempt to fend off competition and drive subscription revenues. The industry is likely to be focused on sustenance at current levels, along with a renewed emphasis on flexibility, which would accelerate the move to a variable cost model and reduce fixed costs.
4 Broadcast Radio and Television Industry Trends to Watch
Shift in Consumer Preference a Key Catalyst: To adapt to the changes in the industry, companies are coming up with varied content for over-the-top (OTT) services in addition to linear TV. The availability of streaming services on a wide range of platforms is helping these services reach a global audience. It is helping them expand their international user base, attracting advertisers to their platforms and boosting ad revenues.
The use of services to help advertisers measure their ROI and enhance their use cases is expected to benefit industry participants. Major leagues and events such as the NFL, NHL, Olympics, European Games, EPL and elections also attract significant ad revenues.
Increased Digital Viewing Aids Content Demand: Many industry participants, either launching their OTT services or acquiring the same, are banking on user insights to deliver the right content. Increased digital viewing makes consumer data readily available to companies, allowing them to apply AI and machine-learning techniques to create/procure targeted content. The move not only boosts user engagement but also allows industry participants to raise the prices of their services at an appropriate time without the fear of losing subscribers.
Uncertain Macro-Economic Scenario Hurts Production and Ad Demand: Advertising is a significant revenue source for the Broadcast Radio and Television industry. Industry participants are bearing the brunt of persistently high inflation, rising interest rates, raised capital costs, a soaring U.S. dollar and an anticipated recession, which encouraged advertisers to trim ad budgets and are expected to impact their top-line growth in the near term. Moreover, industry players face stiff competition for ad dollars from tech and social media companies. This has been a significant impediment to industry participants' growth.
Low-Priced Skinny Bundles Affect Revenues: Increased cord-cutting has forced industry participants to offer "skinny bundles." These services, available through the Internet, often contain fewer channels than a traditional subscription and, therefore, are cheaper. The move is in line with changing consumer viewing dynamics, as growth in Internet penetration and advancements in mobile, video and wireless technologies have boosted small-screen viewing.
The alternative services are expected to keep users glued to their platforms, increasing the need to produce additional content. However, the low-priced skinny bundles are likely to dampen the top line for industry players.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Broadcast Radio and Television industry is housed within the broader Zacks Consumer Discretionary sector. It currently carries a Zacks Industry Rank #175, which places it in the bottom 30% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry's position in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group's earnings growth potential. Since Feb 28, 2023, the industry's earnings estimates for 2024 have moved down 28.3%.
Despite the gloomy industry outlook, a few stocks are worth watching, as these have the potential to outperform the market based on a strong earnings outlook. But before we present such stocks, it is worth first looking at the industry's shareholder returns and current valuation.
Industry Beats Sector and S&P 500
The Zacks Broadcast Radio and Television industry outperformed the broader Zacks Consumer Discretionary sector and the S&P 500 Index in the past year.
The industry has gained 35.7% over this period compared with the S&P 500's return of 28.3% and the broader sector's rise of 10.8%.
Industry's Current Valuation
On the basis of trailing 12-month EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which is a commonly used multiple for valuing Broadcast Radio and Television stocks, the industry is currently trading at 10.77X versus the S&P 500's 14.3X and the sector's 8.52X.
In the past five years, the industry has traded as high as 42.61X and as low as 7.23X, recording a median of 28.54X.
4 Broadcast Radio and Television Stocks to Buy
Netflix: This Zacks Rank #1 (Strong Buy) company is benefiting from its growing subscriber base thanks to a robust portfolio. Crackdown on password-sharing and the introduction of paid sharing in more than 100 countries, which represents more than 80% of Netflix's revenue base, is also expected to aid growth. You can see the complete list of today's Zacks #1 Rank stocks here.
Netflix's diversified content portfolio, which is attributable to heavy investments in the production and distribution of localized, foreign-language content, has been driving its growth prospects. Last month, Netflix launched five short documentaries created by recipients of the Documentary Talent Fund. The filmmakers from across the U.K. & Ireland received £30,000 to create a documentary short film on the theme of connection.
Netflix has acquired the rights to livestream World Wrestling Entertainment's Raw exclusively from January 2025. The rights deal that cost over $5 billion will span a period of ten years, putting Raw on the streaming platform in the United States, Canada, Britain and Latin America.
Netflix's sprawling games portfolio is also expected to have boosted user engagement in the near term. In the fourth quarter, the company started offering the highly popular video game trilogy, Grand Theft Auto: The Trilogy – The Definitive Edition by Take-Two Interactive, to strengthen its position in the gaming industry.
The Zacks Consensus Estimate for 2024 earnings has moved north by 5.9% to $16.93 per share in the past 60 days. NFLX's shares have returned 22.5% year to date.
Warner Bros. Discovery: This Zacks Rank #3 (Hold) company's expanding direct-to-consumer offerings are driving top-line growth. A slow yet steady ad-spending environment, primarily in the international markets, and growing viewership despite incremental spending on marketing and content are expected to drive revenues in the near term.
Its increasing content availability across linear, digital, and over-the-top platforms like Hulu and Sling TV is a major positive. WBD ended the fourth quarter of 2023 with 97.7 million global DTC subscribers, which included 1.3 million subscribers from the acquisition of BluTV.
Warner Bros. Discovery announced an impressive lineup of content, which is expected to boost the top line in the upcoming quarters. This lineup includes movies like Godzilla x Kong: The New Empire, Venom 3 and Red One. The company has partnered with Snap to generate excitement for the upcoming release of Dune: Part Two. The campaign features an array of interactive elements, including an augmented reality (AR) lens and custom cameo stickers, which will complement video ads promoting the film.
The launch of WBD Stream in 2023, a unified digital video offering available to advertisers, holds promise. The new destination for digital video offers advertisers seamless access to the most popular and premium content across Warner Bros. Discovery's portfolio of sports, lifestyle, entertainment and news, including the websites and apps of top brands like Bleacher Report, Food Network, TNT, Animal Planet, ID and HGTV.
Markedly, the stock has declined 23.5% year to date. Notably, the Zacks Consensus Estimate for its 2024 loss has narrowed by 3 cents to 24 cents per share over the past 60 days.
Fox: The company is riding on the growing demand for live programming. The robust adoption of Fox News and Fox Business Network is expected to drive the user base in the near term. Last month, Fox Corporation announced an agreement for a multi-year renewal of all FOX affiliations in Sinclair markets. The 41 renewed markets serve approximately 19 million TV households.
Earlier this month, Fox Corporation announced a partnership with Warner Bros. Discovery to build an innovative new platform to house a compelling streaming sports service. Tubi's exclusive deal with VICE Media Group to debut eight Tubi Original documentaries is expected to boost the popularity and viewership on the platform in the near term.
This Zacks Rank #3 company generates a significant portion of advertising revenues from live programming, which is relatively immune to the rapidly intensifying competition from subscription-based video-on-demand services.
Moreover, recovering ad spending in the local advertising market is a major positive for Fox. Also, increasing affiliate-fee revenues are expected to drive Fox's top line.
The Zacks Consensus Estimate for Fox's fiscal 2024 earnings increased 1.9% to $3.21 per share in the past 30 days. The stock is down 0.8% year to date.
Roku: This Zacks Rank #3 company is benefiting from increased user engagement on The Roku Channel and the popularity of the Roku TV program. It is the #1 TV streaming platform by hours streamed in the United States, Canada and Mexico. The company collaborated with Tennis Channel to launch T2 in the United States.
Roku brings value to TV brands, offering lower hardware costs, more content, low return rates, automatic software updates, wide retail distribution and the strength of the Roku brand. Last month, it launched the Roku Pro Series to expand the lineup of Roku-branded televisions further and to bring more choices to consumers. The company also collaborated with Tennis Channel to launch T2 in the United States.
The launch of third-party streaming channels, including Peacock, Disney+ and HBO Max, is aiding user growth. These services have done well on the Roku platform owing to its large base of engaged users and promotional capabilities.
The Zacks Consensus Estimate for ROKU's 2024 loss has narrowed by 20 cents to $2.13 per share in the past 60 days. The stock has gained 30.5% year to date.
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