Netflix and Disney have had a rough year, and 2023 isn’t looking good

In this photo illustration, a hand holding a TV remote control in front of the Disney Plus logo on a TV screen.

Rafael Henrique | Sopa Pictures | Light Rocket | Getty Images

Media stocks have been shaken this year, with companies losing trillions of dollars in market value as streaming subscriber growth slowed and the advertising market deteriorated.

According to media executives and industry analysts, the pain is likely to continue in the first half of 2023.

Disney Spirit Warner Bros. Discovery, two companies in transition particularly in the streaming space, each hit 52-week lows in the past few days. So far this year, Warner’s stock is down more than 60% and Disney’s is down more than 45%.

The media industry is at an inflection point as competition among streaming services is at an all-time high and consumers are becoming more selective about the number of subscriptions they subscribe to. Additionally, companies are struggling with lower ad revenue and more cable cuts. Some expect a consolidation in the near future.

“There is chaos throughout the industry,” said Mark Boidman, head of media and entertainment investment banking at Solomon Partners. “Everyone has been saying for years that technology will change the media world, and it has. He predicts that bundled streaming will become more important in 2023.

It’s been a consistently tough year for the market. The Nasdaq Composite is heading for its worst decline since 2008 and is positioned to underperform the S&P 500 for the second straight year. The stocks of other industries, including technology, have been looted.

Big tech stocks have lost at least half of their value. streaming giant Netflix The stock is down more than 50%, with its market cap halved to around $123 billion.

Netflix’s first-quarter subscriber loss — the first in more than 10 years — has weighed on the media sector this year.

streaming problems

When Netflix reported that it lost subscribers in the first quarter — the first time in more than 10 years — the news sent a shockwave through the industry. The streaming giant blamed increased competition for this. It also began looking for an ad-supported, cheaper option for customers, something the company had long said it wouldn’t do.

Since then, other media company stocks have followed suit.

Disney, on the other hand, has faced challenges since the early days of the pandemic, when movie theaters and theme parks were closed for months. Disney’s financial performance has come under scrutiny in recent months, and after November’s disappointing earnings report, the company’s board fired Bob Chapek and brought back longtime former boss Bob Iger.

Though Disney investors were immediately excited by Iger’s return, the stock soon faltered, most recently due in part to a less than expected opening box office weekend for Avatar: The Way of Water.

Warner shares were down this year as management for the newly merged company — the merger between Warner Bros. and Discovery this spring — has cut costs, warned about the tough advertising market and focused on making its streaming business profitable going forward close.

Since Netflix’s losses earlier this year, Wall Street has questioned the viability of streaming business models.

“I think everyone has been trying to emulate Netflix in hopes of seeing a similar valuation, and that’s where the lesson ends,” said John Hodulik, an analyst at UBS. “Netflix is ​​no longer valued by a revenue multiple. Investors are asking how direct-to-consumer becomes profitable.”

The sentiment also weighed on Warner, who plans to combine HBO Max and Discovery next year, as well Paramount Global Spirit Comcast’s NBC Universal. Investors are eyeing the number of subscribers and spending on content, which has totaled tens of billions of dollars for these companies.

“Now there’s a new focus on that cost,” Hodulik said. “I think Warner Bros. Discovery is leading the charge, but we’ll see other companies scale back their streaming ambitions over time.”

streamlining of the advertising market

In addition, the advertising market has deteriorated. During times of economic uncertainty, companies often withdraw advertising spending, which is often seen as discretionary.

Paramount missed estimates for the third quarter after ad revenue fell and the stock bottomed in the days that followed. The stock is down more than 45% this year. Paramount shares recently got a boost after Warren Buffett’s Berkshire Hathaway increased its stake in the company, fueling speculation that it could be a takeover target.

Earlier this month, CEO Bob Bakish lowered expectations for the company’s fourth-quarter ad sales at an industry conference. Jeff Shell, CEO of NBCUniversal, also said that advertising for the same conference has steadily deteriorated over the past six to nine months, although he noted that ad revenue would increase in the fourth quarter.

“These stocks have fallen sharply, and investors are wondering why I should buy them ahead of bad news not just in the next quarter, but in the next few quarters,” Hodulik said. “Things could get worse before they get better.”

However, there were some bright spots on the advertising front.

Streamers like Netflix and Disney are now offering ad-supported, cheaper options for customers, which is expected to have a positive impact on their business. “We also anticipate that streaming advertising will become more important in the coming year,” said Solomon Partners’ Boidman.

Political advertising revenue also rose in the third and fourth quarters due to the heated midterm election, which pleased broadcaster owners Nextstar Broadcast Group Spirit Drag reap the benefits. These stocks, particularly Nexstar, have risen year to date despite the broader weakness in their industry as their earnings are heavily dependent on the high rental fees paid by distributors to broadcast from their local networks.

Pay TV Exodus

Cable cutting, while not a new trend for the industry, “accelerated to an all-time worst level” in the third quarter, according to data from MoffettNathanson. Along with the publicity, Paramount cited this as a hindrance to its most recent quarterly results.

For media companies like Comcast and Charter Communicationlagging subscriber growth in broadband, rather than pay-TV, weighed more heavily on their shares.

Charter, which only offers pay-TV, broadband, and wireless services and isn’t gaining a foothold in the streaming wars like rival Comcast, has suffered particularly badly in the stock lately. Charter’s shares are down nearly 50% year-to-date and were hit earlier this month when the company told investors it would increase spending on its broadband network in the coming years. Comcast stock is down more than 30% so far this year.

“We knew the cable cutting was happening, but it has definitely accelerated since the pandemic began,” Hodulik said. “It looks like things will get worse in the first quarter.”

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

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