Launching coverage of the media sector, Wells Fargo analyst Steven Cahall initiated Disney (DIS) with an Outperform rating and Netflix (NFLX) with a Market Perform. The analyst believes Disney’s stock is all about direct-to-consumer and sees more value to unlock, but thinks Netflix is at a turning point with investors. Meanwhile, his peer at Pivotal Research cut the streaming giant's price target to $350 from $515 on a slower path to profitability, though he keeps a Buy rating on what he thinks may still be the eventual winner in the global over-the-top race.
BUY DISNEY: Highlighting that the narrative for Disney's stock is now all about direct-to-consumer, Wells Fargo's Cahall started coverage of the stock with an Outperform rating and $173 price target as he sees more value to unlock. The first year of Disney+ could exceed subscriber expectations, he contended, adding that direct-to-consumer growth is the "recipe for multiple expansion." Further, Cahall told investors that "Disney's beauty is that it is a hub of content creation, with a formidable content engine" that includes spokes of monetization from parks, consumer products, media networks, and direct-to-consumer.
The analyst also started coverage of Lionsgate (LGF.A, LGF.B), iHeartMedia (IHRT), WWE (WWE), Gray Television (GTN), Clear Channel Outdoor (CCO), E.W. Scripps (SSP), Sirius XM (SIRI) and Discovery (DISCA) with Outperform ratings.
BEARISH ON VIACOM, CBS DEAL: Negative on the potential Viacom (VIAB)-CBS (CBS) deal, Cahall initiated both stocks with Underperform ratings and price targets of $23 and $40, respectively. "Deal fatigue has set in, the long-term strategy is unclear, and we can't help but wonder if there is risk to future fundamentals," the analyst contended.
Meanwhile, he also started coverage of Fox Corp. (FOXA) and Spotify (SPOT) with Underperform ratings. The analyst warned that the rights costs for broadcasting sports are going up by about 7% per year, and he sees Fox's operating expense rising by about 9% per year from 2018 to 2025. Regarding Spotify, Cahall acknowledged that the company's growth is likely to continue, but argued that it has limited pricing power due to "deep-pocketed" competition.
NETFLIX AT TURNING POINT: Cahall also initiated several stocks with Market Perform ratings, namely Sinclair Broadcast (SBGI), Tegna (TGNA), AMC Networks (AMCX), Entercom (ETM), Interpublic Group (IPG), Nexstar Broadcasting Group (NXST), Omnicom (OMC) and Netflix.
Setting a $288 price target for Netflix’s shares, Cahall argued that the company is at a "turning point with investors," as its subscriber growth no longer appears to be up for debate, or a metric that can be viewed in isolation. Instead, subscriber growth, pricing, and content spending are all "inter-dependent variables" interacting to produce the market's other key performance indicator, which is cash flow, he contended. The analyst argued that Netflix's valuation suggests its "maturation could be a bumpy ride," but added that he would likely get more bullish on the shares when the valuation better reflects the company's maturity as well as when more clarity can be had on its free cash flow profile. Overall, Cahall thinks the biggest debate Netflix might face medium term is how much is the right amount on content.
SLOWER PATH TO PROFITABILITY: Meanwhile, Pivotal Research analyst Jeffrey Wlodarczak lowered his price target for Netflix to $350 from $515 to reflect "materially higher than forecast" market content cost inflation. The analyst pointed out that big internet players appear to be ramping their spend significantly on advertising as they seem to expect an inflection point ahead where over-the-top growth accelerates materially, mostly at the expense of traditional pay TV. Against this backdrop of accelerating industry spend, the right move for Netflix might be to also materially accelerate its spend to keep its "sizeable" content lead on its peers, increase the barriers to entry for new potential entrants, and maintain subscribers, the analyst contended. While Wlodarczak left his subscriber forecasts mostly unchanged, he raised his medium-term cost forecasts, ultimately assuming an annual cash outlay on programming of $35B in 2025, up from $30B previously.
Nonetheless, the analyst reiterated a Buy rating on Netflix shares, saying that with the recent significant stock pullback, sentiment in Netflix "is awful," setting up the stock to "potentially climb a wall of worry" around the launch of Disney+ and AppleTV+ (AAPL). Cahall remains a long-term bull on the Netflix story and still thinks it could win the global over-the-top race and ultimately generate substantial profitability.
PRICE ACTION: In morning trading, shares of Disney have gained almost 1% to $133.68, while Netflix's stock has dropped over 2% to $259.90.