Media Q3 Earnings to Highlight Another Messy Quarter
As we head into another media earnings season beginning with Netflix on Oct. 18, investors have little to be excited about. For all intents and purposes, the media sector is a bit of a mess right now.
The writers’ strike may have come to an end, but the ongoing negotiations between SAG-AFTRA, the actors’ union, and the major studios fell apart Thursday.
Though the failed negotiations aren’t going to cripple the biggest studios, it’s certainly not good news at a time when the industry needs every possible win.
Taking a step back, it’s important to look at the big picture first. And unfortunately, the challenges that have been plaguing the media sector for the better part of a year have not materially improved.
Interest rates continue to stay elevated, streaming profitability is still not quite within reach, large debt levels persist, and content output remains suppressed. Many of the media giants are still in cost-cutting mode, and while that was welcomed by investors initially, it’s not exactly a long-term strategy, either.
The major media stocks haven’t been doing very well. In the third quarter, only Roku and Comcast were able to outperform the broader market. Meanwhile, the biggest losers during those three months were Paramount and Netflix.
Roku stock has been on absolute fire in 2023, rising roughly 73%. While the company is still subject to the macroeconomic pressures, especially with the ad market, its FAST service, The Roku Channel, has been growing its share of viewership and rivaled Peacock and HBO Max in total U.S. viewership in May. Perhaps that’s why investors see an opportunity to invest in a media company with growth potential in a sea of slow-growth peers.
Comcast has also been having a pretty solid year so far, with nearly 24% gains. However, much of the positive sentiment surrounding the stock has little to do with the performance of its shrinking pay-TV business and streaming service Peacock. Even as the company is being squeezed with cord-cutting and lack of profitability for Peacock, other facets of its business are managing to rake in some profits.
And operationally, Comcast is being more efficiently run than its peers. Not to mention, Comcast has some of the healthiest free cash flow in the sector. While it’s not necessarily a growth stock by any traditional sense of the measure, it’s chugging along despite market challenges, and these days, that’s enough for most investors.
On the flipside, we have two very interesting stories in the media industry being told by the two biggest laggards in the space: Netflix and Paramount.
The lack of enthusiasm for Paramount stock is not at all surprising. Investors have been waiting for some sort of consolidation in the media sector, and Paramount has been top of mind for years. The company’s determination to stick it out in a crowded and competitive market is doing itself no favors, and its struggles to stay in the ring will likely continue to drag down its share price going forward.
Then there’s the streaming king, Netflix. While the stock may have struggled during Q3, it’s actually one of the best-performing media stocks on a year-to-date basis. Shares rose 25% so far in 2023. Much of that was because investors were bullish on the company’s password-sharing crackdown and new advertising business.
While those are still certainly positive drivers for Netflix stock, many investors have taken profits ahead of its Q3 results. Expectations are currently high for Netflix to deliver when it reports next week, and while there are still bull cases to be made for Netflix and its continued growth, but there are still some valid concerns that it may have exhausted all its options for future growth catalysts. As is the case every earnings season, many will be looking to Netflix’s results for clues and guidance as to how the larger streaming business is positioned ahead.
The media business is not an easy one and it happens to have fallen on tough times. There has been growing pains as streaming profitability has yet to outpace the declining linear TV biz. Unfortunately, scale and strong monetization models are crucial to survival and all others will be pushed out. Many were optimistic about the back half of 2023, but the media business needs more time to figure it out and any investment in the space needs to be a long-term one.
