Hopes for a business bounce back amid the pandemic — boosted by the vaccine rollout — and increased confidence in streaming growth prospects helped propel many Hollywood stocks during the first quarter of 2021, which wrapped up on Wednesday.
But it was also a volatile rollercoaster of a period as small investors faced off with big Wall Street institutions in showdowns over video game retailer GameStop and other stocks and Archegos Capital Management and its banks late in March began liquidating big positions in blue-chip companies, including ViacomCBS and Discovery, causing big recent drops.
"Given their cyclical characteristics, several media and entertainment stocks have been rightly perceived as reopening plays, significantly running up on the prospects for the imminent widespread availability of vaccines on the heels of a historic U.S. economic stimulus package that should prop up consumer spending," CFRA Research analyst Tuna Amobi tells The Hollywood Reporter. "Investors have also warmed to some of these names as they increasingly pivoted to direct-to-consumer offerings, recently sending their shares to all-time highs while fanning the flames for a potential short squeeze."
With the broad-based S&P 500 stock index growing 6 percent during the first quarter, Hollywood conglomerates have had a mixed outing, with Walt Disney shares ending the period up 2 percent at $184.52, ViacomCBS climbing 21 percent to $45.10 — though retreating from a 52 week high of $100.24 on March 22 — and Fox Corp. jumping 26 percent to $34.93.
Meanwhile, Comcast finished the opening quarter of 2021 up 4 percent to $54.11, while AT&T gained 5 percent to $30.27. Elsewhere, Lionsgate is up 28 percent so far this year to $14.95, while Discovery gained 46 percent to $43.46 — after also retreating from a 52 week high of $78.14 on March 22 — and AMC Networks gained an impressive 48 percent to end the quarter at $53.16.
In contrast, streaming giant Netflix, which has often risen in recent years, is down 4 percent year-to-date as of Wednesday's market close at $521.66 after the stock seesawed in market action during the quarter.
Guggenheim analyst Michael Morris on Monday touted Netflix's outlook though, maintaining his "buy" rating and $625 stock price target. "Netflix continues to strengthen its value proposition for both content creators and consumers by deepening local investments in key markets," he wrote in a report entitled "Intense Focus on Local Authenticity Expands the Netflix Value Proposition." Morris argued that "this core focus should further strengthen a sustainable content leadership position, driving member growth and pricing power, even as media competitors expand their own streaming investments."
Other sector stock discussions have in recent days focused on the issue of volatility.
Asked about the big blocks of shares held by Archegos and related companies flooding the market, Amobi tells THR: "The still-unfolding liquidation block trades involving two of the prominent names – ViacomCBS and Discovery – seems to have caught investors flat-footed, sending those shares in a dramatic tailspin through a tumultuous week, just as ViacomCBS was poised to cash into what now seems like ill-timed equity offerings, further spooking some investors." ViacomCBS had earlier in March unveiled a $3 billion stock sale to capitalize on recent stock price gains.
Looking ahead, Amobi predicts: "While some of the stocks could be susceptible to further volatility in the near-term, we surmise the fundamental outlook remains largely untethered from the recent exogenous events." He sees that as a chance, "a contrarian buying opportunity for select stocks whose premium valuation evaporated on the recent sell-off and are now trading in line, or in some cases at a notable discount, to their peer and historical average multiples."
Analysts have in recent days particularly discussed the fallout of the volatility in ViacomCBS and Discovery shares.
Goldman Sachs' Brett Feldman on Monday reiterated his "buy" rating on the stock with a $75 price target, arguing it was "materially undervalued following a 52 percent decline in the stock last week" and highlighting "the substantial (70-80 percent-plus) valuation gap that we now see between ViacomCBS' streaming business and streaming bellwethers Netflix and Disney."
But MoffettNathanson's Michael Nathanson downgraded ViacomCBS shares to "sell" after the recent run-up, explaining: "While we have increased worries about pressure on the company’s linear affiliate fee negotiations post the NFL announcement, we see a tough economic trade of shifting linear revenues to direct-to-consumer."
Last week, Wells Fargo's Steven Cahall downgraded ViacomCBS and AMC Networks to "underweight" and Discovery to "equal weight," writing: "We think the companies are better off than they were in 2020 due to direct-to-consumer, but there's too much risk to justify the recent valuations without a technical premium." He added: "These stocks will settle above prior norms, which is reflected in our new targets, and investors should be cautious of continued volatility."
Nathanson has overall returned to evaluating entertainment stocks on the concept of "haves" and "have-nots," which he has previously used. He now applies it "to describe the economic attractiveness of the pivot to direct-to-consumer (DTC) versus linear economics." He explained: "In this new world, we think Disney, Discovery and AMC Networks can benefit from a measured shift from linear to DTC economics, while the rest of the sector appears to be more challenged. In particular, we expect [AT&T-owned WarnerMedia's] Turner, [Comcast's] NBCUniversal and Fox would be most hurt by a sudden and rapid collapse in pay TV subscribers."
