Media Stocks Need Streaming Growth for Earnings Lift, Morgan Stanley Says

Josh Sapan speaks onstage during the 35th Anniversary Walter Kaitz Foundation dinner - Getty -H 2020
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Analyst Benjamin Swinburne forecasts TV channels facing advertising and cable subscriber losses will succeed by how big a slice of the streaming pie they carve out.

Investors eyeing media stocks battered during the coronavirus pandemic from a TV ad recession and cord-cutting should tune into the streaming opportunities of TV networks for potential earnings growth, Morgan Stanley analyst Benjamin Swinburne argued Tuesday.

In an investors note, Swinburne said the impact of cord-cutting and ad revenue drops is already priced into TV-centered media stocks, so the next leg up for share prices should come from proof entertainment players can defy Netflix and drive sustainable earnings from the streaming space.

As an example, AMC Networks, which pointed to strong subscriber growth across its Acorn TV, Shudder, Sundance Now and UMC (Urban Movie Channel) subscription VOD services when reporting its second quarter earnings on Tuesday, needs to grow its streaming assets even more to lift its share price, the Morgan Stanley analyst asserted.

Swinburne forecast AMC Networks, led by CEO Josh Sapan, will end 2020 with 3.7 million subscribers across its four streamers, and will reach guidance of over $500 million in revenues by 2024. "We believe the current shelter-in-place policies have accelerated the transition to streaming and AMC's targeted S-VOD services are likely benefiting," he wrote.

Hollywood's escalating streaming wars is being led by Netflix, Amazon Prime Video, Disney+ and Apple TV+, while new and established players are also looking to nab their own share of global online TV subscriptions.

So while touting Discovery for building out its direct-to-consumer streaming business, including with Food Network Kitchen, an online lifestyle network launched in partnership with Amazon, Swinburne sees reduced TV ad revenues and the delay of the Summer Olympics by one year to 2021 reducing the cable company's investment in the online TV space, which will undercut future earnings.

"We believe that (Discovery stock) valuation will remain pressured until we have a better view into the level of digital revenue/investments and the timeline to stability in international advertising," the Morgan Stanley report argued.

Discovery last year also struck a deal with the BBC for natural history and other factual programming, which will help power a new global subscription VOD service set to launch this year, while also signing a strategic alliance with the PGA Tour to create a global home for golf fans, which includes video streaming service GolfTV.

Turning to ViacomCBS, Swinburne said the recombined media giant has an "integration challenge" ahead of it after unveiling plans for a "House of Brands" streaming service that builds on CBS All Access and which complements its free Pluto TV and premium pay Showtime OTT offerings.

"We do believe ViacomCBS' streaming assets are growing rapidly, led by All Access, and that it owns valuable IP to ultimately grow earnings. However it remains unclear how best to monetize this IP to ultimately grow earnings," Swinburne wrote.

Elsewhere, Fox Corp., which is reporting its latest financial results on Wednesday, saw its stock downgraded by Swinburne due to the media firm that emerged from the $71.3 billion sale of 21st Century Fox assets to Disney being without "any clear path towards substantial earnings from streaming."

The new Fox is largely focused on news and sports, and only recently completed the purchase of Tubi to get a foothold in the free, ad-supported streaming arena.