FWONB - After earnings media space may see shallower ad dent 2023 rebound - Morgan Stanley

2023-03-07 14:06:47 ET

Earnings season has wrapped up in the media and entertainment space, and weighing the results (and some guidance for the coming year) has Morgan Stanley seeing the potential for a shallower ad trough than expected and some upbeat notes for a recovery in the second half.

In a "surprise," analyst Benjamin Swinburne noted, the firm's 2023 estimates for the pure advertising names came up - for those including ad holding companies (Interpublic Group ( IPG ) and Omnicom ( OMC )) as well as Lamar Advertising ( LAMR ), Outfront Media ( OUT ) and Clear Channel Outdoor Holdings ( CCO ). One exception there is iHeartMedia ( IHRT ), which the firm rates Underweight.

National TV and digital ad revenues were down 9% and 3% year-over-year" respectively in the fourth quarter, Swinburne said, "while ad agencies (+7%) and [out-of-home advertising] were nicely positive."

Meanwhile, consensus has built around a second-half recovery in the ad space, and Q1 may mark the trough, he noted - and if that's the case, stocks that could outperform include Outfront ( OUT ), Warner Bros. Discovery ( WBD ), and Vizio ( VZIO ), not to mention a couple of stocks that Morgan Stanley is Underweight on: iHeartMedia ( IHRT ) and Roku ( ROKU ).

Turning to streaming, he noted that while net subscriber adds were a bit better than expected, that still reflected a year-over-year drop of almost 50%; this as the industry is rebalancing away from a "streaming-first" mentality for all properties, toward monetization that looks in other directions (linear, theatrical, licensing) and cutting content costs and taking impairments.

What that rebalancing means for long-term earnings is still a debate, Swinburne pointed out. But the result should be a benefit in near-term earnings for the likes of Disney ( DIS ), Warner Bros. Discovery ( WBD ), AMC Networks ( AMCX ), Lions Gate Entertainment ( LGF.A ) ( LGF.B ) and Paramount ( PARA ) ( PARAA ).

He also points out two other beneficiaries of the streaming shifts - but for different reasons. Netflix ( NFLX ) "has likely already weathered peak competitive intensity," he said, while at the same time it's "implementing a growth strategy that relies less on net adds and a greater focus on monetizing existing engagement through paid sharing and an ad tier," a good strategy but one that may be showing up already in share price and estimates.

As for a pivot back toward theatrical distribution, though, that bodes well for Cinemark ( CNK ), which the firm rates at Overweight, saying the movie business should be the fastest growing in U.S. media this year.

In music streaming, execution on Spotify's ( SPOT ) price increases is likely key to outperformance from that stock as well as Warner Music Group ( NASDAQ: WMG ), both of which Swinburne rates Overweight. Spotify has likely captured the "pivot to profitability" message, up 56% year-to-date, and now it will need to deliver on those expectations, he noted. Meanwhile, Warner Music generated about $1B in revenue from Spotify in fiscal 2022 - about 27% of WMG's streaming revenues.

And turning to live entertainment, consumer spending has looked robust (hotel, airline and gaming stocks are mostly up 15-30% year-to-date), but some stocks have lagged in performance - including Endeavor Group Holdings ( NYSE: EDR ), Disney ( DIS ), and Live Nation Entertainment ( LYV ). The sports rights marketplace is strong, though, with YouTube's ( GOOG ) ( GOOGL ) Sunday Ticket deal marking the latest support for that stance.

With the new information from earnings, Morgan Stanley's top picks in media/entertainment include "laggards" among its Overweight stocks - namely Endeavor Group Holdings ( EDR ) and Warner Music Group ( WMG ), as well as Formula One Group ( NASDAQ: FWONK ).

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