Netflix, Disney have had a rough year and 2023 is not looking good

In this photo illustration a hand holding a television remote in front of the Disney Plus logo on a television screen.

Raphael Henrique | Sopa Pictures | Light flare | Getty Images

Media stocks have been rocked this year, with companies losing billions of dollars in market value, as streaming subscriber growth waned and the advertising market soured.

The pain is expected to continue into the first half of 2023, according to media executives and industry analysts.

disney and Discovery of Warner Bros., two companies in transition, particularly in streaming, have each hit a 52-week low in recent days. So far this year, shares of Warner are down more than 60% and Disney more than 45%.

The media industry has come to a crossroads as competition between streaming services is at an all-time high and consumers are increasingly demanding about their subscription numbers. On top of that, businesses are facing lower ad revenue and more cord cutting. Some expect consolidation to occur in the near future.

“Across the industry, it’s chaos,” said Mark Boidman, head of media and entertainment investment banking at Solomon Partners. “Everyone has been saying for years that technology is going to change the media world, and it is. But now we’re at this real point where it’s the critical moment.” He predicts that bundled streaming will become more prominent in 2023.

It was a difficult year on all levels for the market. The Nasdaq Composite is heading for its worst decline since 2008, and it is positioned to underperform the S&P 500 for a second straight year. Stocks in other industries, including technology, were crushed.

Major tech stocks have lost at least half their value. Streaming giant by Netflix the stock fell more than 50%, with its market capitalization halved to around $123 billion.

Netflix’s loss of subscribers in the first quarter – the first in more than 10 years – has weighed on the media sector this year.

Streaming issues

When Netflix announced it lost subscribers in the first quarter – the first time in more than 10 years – the news sent shockwaves through the industry. The streaming giant blamed increased competition. It also began exploring a cheaper, ad-supported option for customers, something the company had long said it wouldn’t do.

Since then, other media company stocks have followed suit.

Disney, meanwhile, has faced challenges since the early days of the pandemic, when movie theaters and theme parks were closed for months. Disney’s financial performance has come under scrutiny in recent months and, following its disappointing earnings report in November, the company’s board ousted Bob Chapek and brought back former longtime boss Bob Iger.

Although Disney investors were immediately thrilled with Iger’s return, the stock faltered soon after, in part due to a weaker-than-expected box office opening weekend for “Avatar : The Way of Water”.

Warner’s actions have come under fire this year as management of the newly merged company – the merger between Warner Bros. and Discovery closed this spring – cut costs, warned of the tough advertising market and focused on making its streaming business profitable going forward.

Ever since Netflix’s losses earlier this year, Wall Street has been questioning the viability of streaming business models.

“I think everyone was trying to emulate Netflix in hopes of seeing a similar valuation, and at this point the template is in place,” said UBS analyst John Hodulik. “Netflix is ​​no longer valued at a revenue multiple. Investors are wondering how direct-to-consumer achieves profitability.”

The sentiment also weighed on Warner, which plans to combine HBO Max and Discovery next year, as well as World Paramount and by Comcast NBCUniversal. Investors have a magnifying glass on subscriber numbers and content spend, which has run into the tens of billions of dollars for these companies.

“Now there’s a new focus on those costs,” Hodulik said. “I think Warner Bros. Discovery is leading the charge, but we’re going to see other companies scale back their streaming ambitions over time.”

Tightening of the advertising market

On top of that, the advertising market has deteriorated. In times of economic uncertainty, companies often reduce advertising spending, which is often considered discretionary.

Paramount missed third-quarter estimates after advertising revenue plummeted, with its stock hitting a low in the following days. The stock is down more than 45% this year. Paramount shares recently rose after Warren Buffett’s Berkshire Hathaway increased its stake in the company, fueling speculation that it could be an acquisition target.

Earlier this month, at an industry conference, CEO Bob Bakish downgraded expectations for the company’s fourth-quarter ad sales. NBCUniversal CEO Jeff Shell also said at the same conference that advertising has steadily deteriorated over the past six to nine months, although he noted ad revenue will rise in the fourth quarter.

“These stocks are down a lot, and investors are wondering why I would buy this before bad news, not just next quarter, but future quarters,” Hodulik said. “Things could get worse before they get better.”

There were a few positives on the advertising front, however.

Streamers like Netflix and Disney are now offering cheaper, ad-supported options for customers, which should be good for their businesses. “We also expect streaming advertising to become more prominent in the coming year,” said Solomon Partners’ Boidman.

Political advertising revenue also increased in the third and fourth quarters due to the stormy midterm elections, with broadcast station owners like Nexstar Broadcast Group and Label reap the benefits. These stocks, particularly Nexstar, were both up year-to-date, despite their industry’s overall weakness, as their revenues are heavily dependent on the high fees distributors pay to stream their local networks.

Release of Pay TV

Cord cutting, while not a new trend for the industry, “accelerated to an all-time worst” in the third quarter, according to data from MoffettNathanson. Besides advertising, Paramount cited it as a hindrance in its latest quarterly results.

For media companies like Comcast and Charter Communicationslagging subscriber growth on the broadband front, rather than the pay-TV market, weighed more significantly on their shares.

Charter, which only offers pay-TV, broadband and mobile services and doesn’t have a foot in the streaming wars like its counterpart Comcast, has seen its stock particularly suffer recently. Charter’s stock is down nearly 50% year-to-date, and it took a hit earlier this month when the company told investors it would increase spending on its broadband network in coming years. Comcast shares are down more than 30% so far this year.

“We knew the cord cut was happening, but it’s definitely accelerated since the pandemic started,” Hodulik said. “It seems to get worse as we go into the first quarter.”

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

Author: niso

Leave a Reply

Your email address will not be published. Required fields are marked *