Euro TV Stocks to Be Hit by Same Worries as U.S. Peers, Bernstein Analysts Predict

Regulation Fears Hit Chinese Online Video Giants

Shares in Chinese online video giants Youku and Tudou took a dive this week as the Beijing government cracks down on online video with stricter regulations. The new laws will require Internet video providers to pre-screen all programming before making it available.

With traditional TV viewing affected by digital players, the Wall Street firm expects "an era of volatility and possibly long-term declines in valuation for TV stocks on both sides of the Atlantic."

Sanford C. Bernstein analysts Claudio Aspesi and Todd Juenger in a report on Thursday looked at the fallout of the recent U.S. entertainment sector stock meltdown on European TV stocks.

In their report entitled "Missing the Forest for the Trees? Why Some Recent Troubles in U.S. TV Also Matter in Europe," they said that "the U.S. and European TV sectors have evolved differently, leading us, until about a year ago, to be more optimistic for the future of U.S. TV." Amid declines in traditional TV viewing in the U.S. and Walt Disney's recent reduction in its financial forecast for ESPN and related cord-cutting fears, the Wall Street firm recently downgraded several U.S. stocks.

In Europe, analyst Aspesi has long said he was "lukewarm" about the long-term outlook for broadcasters. "Looking ahead, however, we believe that the decline in TV viewing we are seeing in many countries, and the rising preference of younger consumers for watching video on smaller, more "personal" screens (laptops, tablets and even smart phones), is the harbinger of significant changes in how video is consumed," the Bernstein team wrote. "Traditional free-to-air broadcasters will argue that changing measurement criteria to include the smaller, "personal" screens will address the concerns. We are not as optimistic and think that — over time — short video and non-traditional OTT "broadcasters" will take share away from traditional TV viewing, ushering an era of volatility and possibly long-term declines in valuation for TV stocks on both sides of the Atlantic."

Aspesi explained: "After an initial decline, European TV stocks shrugged off the August U.S. media meltdown because of differences in how TV operates. This view ignores the root cause of the meltdown, which was driven by global changes in consumer preferences in video viewing."

He added: "European free-to-air TV is heading for ad market share declines in several markets, as competition intensifies; medium-term forecasts are declining quickly. Pay TV should prove more resilient because of larger content budgets and the recurring revenue model. U.S. media companies searching for growth outside the U.S. face a future that increasingly resembles the U.S., causing investors to lower their growth and valuation for international operations of U.S. media companies. We have no good argument against that view."

In Europe, Bernstein rates Britain's ITV at "outperform" "largely because of the expected growth of U.K. TV advertising in 2015 and Italy's Mediaset at "underperform" "largely because we doubt the expected recovery of Italy will materialize."The company rates European pay TV giant Sky and Vivendi at "market-perform."