How Fox stands to benefit from new sports streaming venture

Shares of Fox (FOX, FOXA) closed higher after the company received an upgrade from Citi to Buy from Neutral, with a price target of $35 per share. The upgrade stems from Fox's sports streaming partnership with Warner Bros. Discovery (WBD) and Disney (DIS).

Jason Bazinet, Citi Managing Director, joins Yahoo Finance to discuss the reasons behind his call to upgrade the company and how the company may be positioned going forward.

Bazinet elaborates on the reason for his call despite investor skepticism: "There's a lot of skepticism about the efficacy of this sports bundle on two fronts. One is a lot of investors don't believe that consumers are going to buy it because it only contains about half of the sports rights. And the second reason is they fear that a lot of people will buy it, but they're going to spin down from their big, fat pay TV package to something that's cheaper and thinner, and that's going to hurt Fox. That's why Fox traded down on the news. Our thesis is pretty simple. A lot of people are going to buy this and it's actually going to bring in cord cutters, cord nevers that have never had a pay TV subscription. It's actually going to be positive for the stock."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

JOSH LIPTON: Shares of Fox scoring an upgrade today, thanks to optimism on the entertainment company's planned sports streaming bundle with Warner Brothers Discovery and Disney's ESPN. Joining us now is the analyst behind that call, Jason Bazinet, Citi Managing Director. Jason, always good to have you on the show. So you upgrade Fox to a buy, Jason. Your target goes to 35. How come, Jason? Walk us through the argument.

JASON BAZINET: Well, there's a lot of skepticism about the efficacy of this sports bundle on two fronts. One is a lot of investors don't believe that consumers are going to buy it, because it only contains about half of the sports rights. And the second reason is they fear that a lot of people will buy it. But they're going to spend down from their big fat pay TV package to something that's cheaper and thinner. And that's going to hurt Fox. And that's why Fox traded down on the news.

Our thesis is pretty simple. A lot of people are going to buy this. And it's actually going to bring in cord cutters, cord nevers that have never had a pay TV subscription. And it's actually going to be positive for stock-- for the stock.

JULIE HYMAN: And is it going to benefit Fox more than the other members of the venture?

JASON BAZINET: It will. I'll tell you the ratio. The ratio that we look at is if you look at a media company, how much of their affiliate fees are they getting from sports versus how much are they getting from non-sports? The more you get from sports, the simpler that ratio is for you to digest. So in the case of Fox, they could have 2 and 1/2 people spend down from a big fat bundle to this sports JV for every new person that signs up. If you look at someone like Warner, it's almost one for one.

So it definitely benefits firms like Fox and Disney much more than it does Warner and certainly more than people that aren't in the JV.

JOSH LIPTON: And, Jason, what's your best guess about what the price of this service would be? Some of the reports I've seen, I'm sure you've seen the same ones, maybe 40 to 50 per month. It sounds kind of pricey. But what do you think?

JASON BAZINET: Well, I just added up all the affiliate fees that they're getting today that are-- for those linear channels that are going in the bundle and then marked it up 35%. And I came up with a $36 price point. So I think you could see something in the $35 range early on, maybe it goes to 40.

I don't think it gets to 50. What's interesting is if you took what we think this bundle will cost and you bought Paramount and Peacock on top of it, that would get you in the $50 range. But then you'd have 85% of all sports. If you include Amazon in that, you'd have 90%. So you're essentially talking about every piece of sports content for really something that I think will cost 52 bucks a month.

JULIE HYMAN: Jason, I want to move on to one of the other members of the joint venture, Warner Brothers Discovery. The stock trading at a record low after it reported disappointing numbers or numbers at least disappointing most of the Street. I believe you still have a buy rating on the stock. What's going to get it to go up here?

JASON BAZINET: We do still have a buy rating. And our thesis is pretty simple. It was just that the amount of free cash flow that they would generate, they would use it to pay down debt. And essentially, your debt would become equity but even if your enterprise value didn't change.

What ended up happening today and it's happened for a couple quarters in a row is the EBITDA keeps missing Street's estimates. And what's essentially happening is the pressures on the linear ecosystem are just occurring faster than the improvements they're making on the streaming side. It's pretty much that simple.

JULIE HYMAN: And, Jason, so you have a buy on it. But what are the kind of downside risks you would flag, Jason?

JASON BAZINET: Well, more rapid cord cutting, you know, weaker viewership on linear television. And then on the other side of the ledger, the thing that-- most of the missed that they had in this quarter was really at the studio. That's a little bit of an aftershock of the strike and that will persist, I think, probably at least in the first quarter, maybe even the second quarter of this year. And then things should get back to normal where the studio begins to perform better.

JOSH LIPTON: Jason, always love having you on the show. Thanks so much for taking the time to chat with us. Have a great weekend.

JASON BAZINET: You bet. You bet. You, too.