Netflix, this earnings quarter’s big loser from both a subscriber and a financial perspective, is causing concerns up and down Wall Street regarding the overall viability (or lack thereof) of the subscriber-based approach to streaming. And Fox, which has pretty much avoided that business either by choice or by virtue of the fact that Disney bought all its best entertainment assets during the early days of the so-called streaming wars, is riding the Manhattan street’s bull with a big ol’ grin on its face.
The analysts at MoffettNathanson have labeled Fox as their lone “Buy” among the media companies they cover, a position reiterated by Monday’s report titled “U.S. Media: The Point of No Return?” On the bright side, among the other stocks there are no more “Sell” companies in their coverage portfolio. Warner Bros. Discovery, Netflix, Roku (just upgraded on Friday), Cinemark, Disney, Paramount Global, and AMC Networks all have “Neutral” ratings.
Now, the good folks at MoffettNathanson are not arguing that Fox is the most valuable company in the landscape — not by a mile. It is simply, in their opinion, the best value with the highest upside (on a percentage basis) from where it is trading now to where it actually should be selling. Listed as FOXA, shares opened this morning at $36.67 apiece; MoffettNathanson has a target price for FOXA of $50 per share, which represents a premium of greater than 35 percent. That is the largest premium they see out there.
So what is MoffettNathanson seeing that potential shareholders are not? As we alluded to above, suddenly, the forecasts that show Fox to have the lowest share of digital revenue in the landscape in 2025 (MoffettNathanson estimates 21 percent of total company revenue then will come from Tubi, Fox Nation, Credible, and other digital advertising) is actually a good thing. By effectively avoiding SVOD (subscriber video on-demand) on a large scale (Tubi is a FAST platform while Fox Nation does carry a subscription fee), Fox has kept its streaming investments relatively low and also does not have to ride out those predictable first few years (at least) of losses.
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Another factor helping Fox’s value is a lack of panic on the trading floor. Last month’s fire sale of Netflix stock had residual effects at fellow streaming giant Disney (and surely that company’s Florida tax-status battle is not helping matters). Uncertainty surrounding the newly formed Warner Bros. Discovery, a combination of WarnerMedia and Discovery, Inc., has also created a pretty immediate double-digit decline in enterprise value there. Meanwhile, Fox’s value has increased 2 percent year-to-date, bucking a trend; so traders kind of get it, MoffettNathanson would argue — just not enough.
But what is Fox even doing right? Well, for one, the 2019 Disney mega-deal, in which The Walt Disney Company paid more than $70 billion (thanks in part to Comcast bidding them up) for most of Fox’s entertainment assets, right-sized the Murdoch-run company. The reduction in revenue opportunities forced Fox to lean heavily on news and sports, which just so happen to be the two things linear television still does well and the big strengths of Fox itself. With the NFL, the World Series, WWE’s “SmackDown,” and other live-sports properties, the Fox network has some pricey-yet-effective ways of regularly earning a disproportionate amount of broadcast’s market share. And Fox News Channel just annihilates its cable news competition in viewership — and often the entire cable landscape, regardless of genre.
In C3 ratings, a measurement regularly used to quantify the reach of TV advertisements, Fox’s cable networks group was up 19 percent in the first quarter of 2022. For a direct comparison, Disney’s portfolio, the second-biggest grower year to year, was up 7 percent; AMC Networks rose 4 percent. Everyone else was down, some worse than others: Turner, which now exists under Warner Bros. Discovery but was an AT&T-owned property at the time, sunk 28 percent in viewers; NBCUniversal’s cable portfolio dropped 23 percent.
Before heads explode at the NBCU corner offices, we’d better get to broadcast. There, NBC saw huge ratings increases (+36 percent), but those can be explained away as a one-off boost due to hosting the Winter Olympics and the Super Bowl — a perfect, but temporary, storm. Everyone else was down. But guess who was the most stable broadcast network in C3 numbers? Right, it was Fox, losing just 2 percent of its viewership from the comparable quarter in 2021.
Shares of FOXA, we should point out here, have been pretty much flat for a year, though have temporarily ebbed as high as nearly $45 per share and flowed as low as just-above $34 per share. Basically, MoffettNathanson believes the market hasn’t priced Fox right since its all-time high of $52.01 back in March 2019. Guess when Disney paid $71.3 billion for those Fox assets? Right again.
MoffettNathanson is not the only analyst group high on Fox; the stock is generally considered a “Buy” that is currently undervalued by quite a bit. In its own Monday report, UBS raised Fox from a “Neutral” to a “Buy” and also set its target price at $50. Morgan Stanley went up to $50 on Fox back in February, when they last gave FOXA their “Overweight” rating, which sounds bad but is actually good when talking about a stock’s potential.
Don’t go dumping your life savings into FOXA and blaming IndieWire/MoffettNathanson if it doesn’t work out (we’ll still take the credit and a cut if it does) just yet; there are some important risks here to cover. For starters, there are no guarantees that Fox keeps all of its sports deals when the next set(s) of negotiations come(s) around — especially with the streaming players scrambling for market share. Amazon Prime Video, for example, recently paid $1 billion per season (15 regular-season games each season and one preseason game over the next 11 years) for “Thursday Night Football,” a marquee NFL package that was previously at Fox. Even if Fox hangs on to its current rights packages, cost inflations (because they never go down, especially these days) could put much more strain on the company’s efforts to remain lean and mean — which, to keep the rhyme scheme going, is exactly what makes the MoffettNathanson analysts so keen.
While subscriber-based streaming is suddenly not looking like a slam dunk (a semi-purposeful basketball reference for a story about a channel that pretty much only lacks basketball in the sports landscape), linear TV is still a dying format. There is no sugar-coating that fact. In the short term, Fox and others may still command significant retransmission (broadcast) and carriage (cable) fees, and its sports and news programming mask the continuing decline of traditional television viewership, but the handwriting has been on the wall for linear TV for years now. Fox may just be best at delaying the inevitable — or it is at least not overspending as the inevitable unfolds. And that’s how you become a “Buy” in 2022.