Netflix and Gaming Stocks Gain, Many Hollywood Majors Fall Amid Pandemic

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Ernesto S. Ruscio/Getty Images for Netflix

One analyst says that there may be an "exaggeration" of negative expectations among media and entertainment investors.

Big media and entertainment stocks rebounded in the second quarter — along with the broader market as investors overall seemed to shrug off concerns about the novel coronavirus pandemic and the recession it has been expected to cause — but remain in negative territory for the year.

Sector investors had already been concerned about cord-cutting, the continued rise of streaming giants like Netflix, and new services, such as TikTok, grabbing younger audiences' attention. Then the pandemic hit in March, dragging down Hollywood stocks amid shuttered cinemas, the end of live sports, interrupted film and TV productions, and worries about the fallout from the recession caused by the virus. And given the lack of past experience with a global pandemic's effect on Hollywood stocks, Wall Street has continued to debate how long and lasting an impact it will have on the sector.

With the dust settling on the first half of 2020 at the market close on Tuesday, U.S. stocks seemed to have had the best quarter in more than 20 years. But while the stocks of many big-name entertainment companies rose in the second quarter, they finished the first half down much more than the broad-based S&P 500 stock index, which is down about 5 percent as of the halfway mark of the year despite a 20 percent gain in the past three months.

Netflix, whose strong first-quarter subscriber gain signaled it had benefited from stay-at-home orders worldwide, has gained 41 percent year-to-date, including more than 20 percent in the second quarter. Video game stocks are also key winners, with Activision up 28 percent, Electronic Arts up 22 percent and Take-Two Interactive up 13 percent year-to-date.

Among entertainment biggies, Sony Corp.'s U.S.-listed shares are the one gainer for the first six months of the year, ending them up 1.5 percent after gaining more than 16 percent in the second quarter alone. NBCUniversal owner Comcast finished the first half down 13.3 percent (despite a 13 percent gain in the second quarter), Walt Disney ended it down 24 percent (but up more than 16 percent in the latest quarter), and WarnerMedia owner AT&T ended the first half down 22.6 percent (after rising 3 percent in the past three months). 

Meanwhile, Fox Corp.'s shares dropped 26.4 percent over the first half (but rose 13 percent in the second quarter), with ViacomCBS being the worst performer among industry giants for the year so far with a 44.3 percent drop, but having an extraordinary second quarter that saw it climb more than 65 percent.  

Among smaller entertainment companies, Lionsgate's stock dropped 30.5 percent over the course of the first half (but rose 21 percent in the latest quarter, Discovery is down 35.4 percent (up 9 percent in the quarter), and AMC Networks shares are down 40.6 percent for the year (and also posted a small decline in the second quarter).

Cinema groups have been among the hardest-hit stocks in the broader industry due to theaters being shuttered for the past quarter amid the pandemic. AMC Theatres' stock finished the first half of 2020 down 41 percent, while Imax Corp. ended it down 45 percent, and Cinemark fell by 60 percent. 

"The cyclical components and high debts are finally being recognized by the market," Vogel Capital Management CEO and former Wall Street analyst Hal Vogel tells THR. And the pandemic means less revenue coming in. "For example, Disney and Comcast have theme parks that will operate at fractional capacity ... [and] advertising is still down across the board" despite some recent suggestions that the worst pandemic-related drop was now behind the industry.  

Guggenheim Securities analyst Michael Morris expects sector stocks to remain under pressure, but in a June 15 report also wrote: "We want to keep investors focused on core estimate, valuation, and industry discussion data, which indicates an exaggeration of incrementally negative expectations as compared to advertiser and consumer sentiment."