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Hollywood Stocks 2024 First Half Year Review

Hollywood Stocks 2024 First Half Year Review

TikTok and artificial intelligence are on the rise. Cord-cutting is slashing linear TV profits. The advertising market has major question marks. Management teams across Hollywood, put on notice by Wall Street for streaming profitability, are hunting for more cost cuts and possible mergers and asset sales to optimize asset portfolios.

Hard times for media and entertainment stocks has investors mostly wary sector giants can reach sustainable streaming profits by balancing reduced content spending with subscriber growth and retention.

The result is shares of many entertainment giants are “show me stories,” with a wary Wall Street wanting evidence a decline in traditional media businesses will stop or even reverse and top executives can make newer business segments and operating models work.

With investors shunning uncertainty, the first half of 2024 produced a mixed bag for Hollywood stocks. Expect much talk about where to go and what to do next to make a business strategy work when industry CEOs and their tech brethren head to Sun Valley, Idaho for the annual Allen & Co. gathering, also known as summer camp for moguls.

A case in point is Paramount Global where, despite big franchises, a studio carrying a big debt load has seen its stock hit hard over the first six months of the year. And that’s after deal chatter around controlling shareholder Shari Redstone studying and then rejecting a best and ultimately failed bid from David Ellison’s Skydance Media. That’s left the new trio of CEOs — Chris McCarthy, George Cheeks and Brian Robbins — running the studio after the ouster of CEO Bob Bakish to convince employees and investors Paramount Global can be a growth story again. Stock in the studio closed down 28 percent for the year so far as of Thursday.

Warner Bros. Discovery — where CEO David Zaslav and his team are also focused on reducing debt and shoring up profits from streaming and prized assets like Warner Bros., CNN and Harry Potter — was another big loser in the first half of 2024. The sprawling conglomerate’s CFO Gunnar Wiedenfels has talked up cost-cutting as part of a turnaround scenario, investors spooked by management’s lack of full-year financial guidance after recently reporting the first quarter financials. As of market close, the stock was down 37 percent year-to-date.

Not even media, entertainment and technology giant Comcast was safe from a string of daily stock declines, losing 12 percent of its market value since the end of 2023 as it has faced calls to see its investments in Peacock return a profit. As a show me stock, Comcast, a major U.S. cable TV and Internet player, will be hoping the show starts with NBCUniversal’s coverage of the 2024 Olympics Summer Games from Paris, which kick off on July 26.

Of course, investors are often in that wait-and-see mood when they have no idea what’s next for a battered stock. Take AMC Networks, the home of such cable networks as AMC and such streamers as Shudder. That company’s shares tumbled 52 percent over the first six months of the year as it faces a challenging advertising market, restructuring costs and other headwinds.

There were some rays of light across the media stocks universe though. At the Walt Disney Co., CEO Bob Iger fended off dissident shareholders in a proxy battle. And the conglomerate’s latest quarterly earnings gave investors confidence as it neared streaming profitability for its combined direct-to-consumer businesses of Disney+, Hulu and ESPN+.

But the stock dropped following the earnings report amid some questions about theme parks unit trends and its linear TV business struggling with a revenue fall and lower overall ratings. Still, Disney shares ended the first half of the year 12 percent higher.

And the stock of Fox Corp., where this election year is shining a spotlight on the Fox News juggernaut, gained 13 percent year-to-date. Investors also see a lift for its shares from its upcoming sports streaming bundle with Warner Bros. Discovery and Walt Disney and the performance of its Tubi platform.

In comparison, the broad-based S&P 500 stock index is up 15.6 percent so far in 2024, meaning many big entertainment stocks have underperformed it.

“The entertainment industry is facing numerous challenges, from changing consumer behavior to significant shifts in advertising spending to the deflationary pressures of streaming,” the analysts of MoffettNathanson wrote in a June 26 report after a trip to Los Angeles. “This has all led to a downturn in profitability for legacy media companies and the rise of new, formidable competitors. Now, firmly in the third act of the streaming wars, we expect to see industry consolidation, decreased spending on scripted content, ever-higher spending on live sports, and a return to third-party content licensing.”

The trip didn’t change their takes on big sector stocks, as they reiterated their “buy” ratings for Disney and Fox, their “sell” rating for Roku, and “neutral” ratings on the likes of Netflix, Paramount, Warner Bros. Discovery, AMC Networks and Cinemark.

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“Fishing for growth: Balancing emerging opportunities and secular headwinds” was the fitting title of Bank of America analyst Jessica Reif Ehrlich’s June 6 report on the state of media. “Media companies are attempting to find emerging areas of growth in the face of secular headwinds,” she explained.

The BofA finance expert highlighted several business areas in media. “Following a period of sustained weakness, there is cautious optimism returning to the advertising market,” she suggested. “A better outlook for the economy and inflation has led to an improvement in the advertising market since the first quarter. Continued recovery will be dependent on the health of the consumer.”

Reif Ehrlich also highlighted: “Under the surface, there is significant disruption taking place in the advertising market driven by the secular decline of linear TV, the rise of AVOD platforms and the shifting of more sports programming to streaming. This trend was underscored at the upfronts, where presentations were geared toward digital capabilities.”

Morgan Stanley analyst Benjamin Swinburne in a May 29 report, entitled “Acceleration – Revisiting Our Investment Outlook,” also took a deeper dive into the state of play in media and entertainment. “As we analyze first-quarter earnings and look ahead to the second half of 2024, the pace of disruption in media is accelerating,” he concluded. “In that context we remain ‘overweight’ Netflix as strong double-digit revenue growth can extend beyond paid sharing benefits. We see the pull-back in ‘overweight’-rated Disney and Cinemark as opportunities,” and he has maintained “underweight” ratings on Paramount and AMC Networks.

As the industry continues to “navigate the opportunity presented by the growth of streaming and the decline of traditional pay-TV,” Swinburne highlighted several trends. “‘Peak TV’ is over, can sports inflation continue?” he asked, for example. “Currently, scripted TV spending appears in decline, theatrical output is on the rise, and the value of sports rights (at least as indicated by demand for the NBA) remains healthy,” the analyst summarized. “Sports spending remains a minority of overall content budgets, supporting at least in concept the potential for continued healthy rights inflation. Long-term, we continue to see sports as a uniquely attractive asset class.”

The Morgan Stanley expert also ended on a bullish note, reminding investors that “media is cyclical.” His takeaway: “As we look into the remainder of 2024, we are generally constructive on the state of both the U.S. consumer and the advertising market.”

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