Many entertainment industry CEOs and investors may want to quickly forget 2022, given how it decimated various media sector stocks.
However, 2023 doesn’t look like it will bring much reprieve near-term. After all, recession fears and their impact on advertising revenue, a recent acceleration of cord-cutting and profitability concerns about Hollywood firms’ streaming businesses are among the dark clouds hanging over the industry.
With that in mind, The Hollywood Reporter is taking stock of some media and entertainment analysts’ picks for the year ahead.
Michael Nathanson, MoffettNathanson
Picks: Walt Disney, Fox
Why: The veteran entertainment industry analyst has “outperform” ratings on the two companies. Nathanson upgraded Disney from “market perform” in late November and raised his stock price target by $20 to $120, citing the return of Bob Iger as CEO. “Magic Is Back,” he summarized his call in the title of his report. “We applaud Disney’s board for the courage to make this change,” the expert explained. “We have never hidden our affection for Mr. Iger and the job that he did in building Disney into the global powerhouse that it has become. We have not recommended the shares since May 2020 for multiple reasons, including concern that the former CEO Bob Chapek had become wedded to a streaming strategy that did not make sense given today’s reality.”
For Fox, on which Nathanson has a $46 stock price target, he is skeptical about a potential recombination with News Corp. But he highlighted in a November report: “As a standalone company, Fox Corp. is just starting to see its current strategy pay off with stronger fiscal first-quarter results and the rest of fiscal year 2023 driven by the next round of affiliate fee step-ups, Super Bowl, political advertising, Tubi, World Cup and the biggest positive to the bottom line – Thursday Night Football losses disappearing.”
John Blackledge, Cowen
Pick: Netflix
Why: The analyst raised his long-term subscribers, revenue and operating income forecasts for the streaming giant on Dec. 9 and, as a result, boosted his stock price target from $340 to $405. All in all, he called Netflix, which he rates at “outperform,” his “top large-cap pick” on Cowen’s list of “Best Ideas for 2023.” Explained Blackledge: “The key drivers for Netflix’s shares in ’23 are (i) new monetization levers, including the new lower-price ad tier (which could drive accelerating net member adds) and the paid sharing solution launching globally in ’23; (ii) revenue re-accelerating in the second half 2023; and (iii) free cash flow growth ramping.”
Michael Pachter, Wedbush Securities
Pick: Imax
Why: Pachter added giant-screen exhibitor Imax, on whose stock he has an “outperform” rating with a $20 price target, to Wedbush’s “best ideas list” in November. “We view Imax as 1) the best way to play the upcoming theatrical rebound, 2) the best positioned to gain from consumers’ ongoing shift toward premium theatrical amenities, 3) a solid way to position for a rebound in the Chinese economy,” he explained. And over the longer-term, the expert also sees it “the best positioned to gain from theatrical alternative content.” Citing an expected return of box office momentum, Pachter predicted: “Once Imax is able to demonstrate consistent profitability, it should once again command a premium multiple.”
Doug Creutz, Cowen
Pick: Take-Two Interactive Software
Why: The entertainment industry analyst highlighted the video gaming stock in a Dec. 12 report entitled “Best Ideas for 2023: Returning to an Old Favorite,” reiterating his “outperform” rating and $147 stock price target. “Take-Two is a top-tier operator in the global video game market with the best long-term track record in its peer group,” he argued. “Management’s recently lowered guidance and general investor malaise around video games have created an attractive entry point.” Touting the company’s “development talent, intellectual property and strong management, Creutz also called Take-Two “a high-quality vehicle to invest in what we expect to be above-GDP growth in video gaming over the next decade.” The expert further suggested that “the market is overly bearish on the Zynga acquisition and mobile gaming in general.” And Creutz expects further clarity on the release date for Grand Theft Auto 6 in the new year, which could be a catalyst for the stock: “We continue to expect GTA 6 in calendar year 2024.”
Benjamin Swinburne, Morgan Stanley
Picks: Endeavor, Warner Music Group, Liberty Media – Formula One Group
Why: “Direct-to-consumer streaming is entering a new phase: rationalization and consolidation,” Swinburne noted in a Dec. 19 outlook report for 2023. “Long-term, this should improve returns. For ’23, we prefer the supply side – content owners in sports, entertainment and music.” Specifically, that means “overweight”-rated Endeavor, his top pick, Warner Music Group and Liberty Media’s Formula One Group. “All offer healthy, often contracted revenue and free cash flow growth,” he emphasized. “In a global media industry seeing ever-expanding distribution, stick to the supply side.” Swinburne highlighted that Endeavor (50 percent upside to his stock price target of $30) “monetizes both sports and general entertainment content,” while Formula One (30 percent upside to his $75 price target) “is benefiting from the rising global popularity of Formula 1.” Meanwhile, Warner Music (20 percent upside to Swinburne’s $41 stock price target) “is one of just three music labels that in aggregate represent about 80 percent of global music consumption.” Added the Morgan Stanley analyst: “Endeavor and Formula One also benefit from highly contracted revenues, limiting the risk of downward revisions from a cooling economy.”
Steven Cahall, Wells Fargo
Picks: Lionsgate and more
Why: “Media themes skew negative (ad pressures, cord cutting, streaming slowing),” the analyst highlighted in a Dec. 20 report, arguing that the broader sector would “remain out of favor til at least cyclical pressure abates.” As a result, in media, “we prefer Disney and Netflix (content+streaming scale, and they are each self-help stories), Fox (cash flow, sports betting, modest valuation), Lionsgate (transaction) and Imax (technology+slate).” Cahall rates Lionsgate shares at “overweight” with a $12 price target. “Lionsgate should be attractive post-spin, but it feels far off,” he wrote in a recent note. “We think Lionsgate continues to work towards its separation of Studios from Starz and mid-2023 spin. While we’re not bullish on the Starz valuation, we think Studios is equal to, if not more, valuable than the current company.” After all: “It’s a gold rush for content, and Lionsgate can be a supplier of pickaxes via its Studio business.”
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Entertainment Stock Picks for 2023: What Wall Street Is Bullish About Despite Downbeat Sentiment - Hollywood Reporter
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