Mid-Year Hollywood Stocks Review: Spotify Soars, Netflix Gains, Paramount Drops
Top executives at media and entertainment giants will be happy to see the end of the first half of 2023, where stock sell-offs and analyst downgrades were recurrent features of their year to date.
In 2022, most Hollywood stocks fell sharply amid pressure by Wall Street on media to push streaming businesses to profitability, increased cord-cutting pressures and a challenged advertising market amid inflation-induced recession fears. From 30,000 feet, many sector shares have returned to healthy growth, while others struggle with declines or slower gains amid industry headwinds.
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Music streamer Spotify was one of the big gainers of the first six months of 2023, ending the half-year period up 103 percent as of Friday’s market close up $1.38, or nearly 1 percent, at $160.64. Layoffs and other cost cuts have given Wall Street more confidence in the company’s profit outlook. “Spotify’s commitment to margin improvement is picking up pace,” Wells Fargo analyst Steven Cahall wrote in February when he upgraded the stock from “equal weight” to “overweight” and boosted his price target from $121 to $180. “Spotify is a better business, but not yet a great business. We see the path to our new target as Spotify largely proving it’s sustainably profitable.”
Lionsgate shares finished the first half of 2023 around 60 percent higher as its stock closed down 26 cents, or 3 percent, at $8.82 on Friday. That’s after a 100 percent jump for its share price posted during the first three months of 2023. Stronger-than-expected financial results and an upcoming split into two companies, scheduled to happen around September, have made Wall Street analysts bullish. “We see these steps making it easier for the separated Starz and studio businesses to be acquired, and see the potential for the studio business alone to be valued meaningfully north of where Lionsgate’s equity currently trades,” Rosenblatt Securities analyst Barton Crockett noted in a report earlier this year. And Cahall similarly in a late May report said Lionsgate was “among the best setups in media.” He raised his stock price target by $1 to $13 and maintained his “overweight” rating, highlighting: “We continue to like the setup for Lionsgate as it will spin Studios in September, creating a likely consolidation target [for] larger media players.”
A bull market in tech stock left Netflix feeling Wall Street love and support as of late, and its shares gained 49.4 percent in the first half of the year to close Friday up $12.25, or 3 percent, to $440.49. TD Cowen’s John Blackledge on June 15 raised his financial estimates for the streaming powerhouse and boosted his stock price target by $60 to $500, while sticking to his “outperform” rating. In his report, titled “Netflix Paid Sharing Likely Helping Conversions,” he shared his firm’s survey data, explaining: “More than a third of ‘borrowing’ respondents across the U.S., U.K. and Germany plan to maintain access to Netflix via either becoming a new member or the existing member paying an extra fee. Netflix’s paid sharing and AVOD tier should drive revenue upside over time.”
Meanwhile, Pivotal Research Group analyst Jeffrey Wlodarczak in a June 9 report raised his stock price target for Netflix to a street-high $535, while maintaining his “buy” rating. Touting the streamer as a “unique growth story,” he wrote: “Netflix should be able to deliver solid subscriber and financial results by better monetizing the 100 million-plus households that use Netflix product [via password sharing] but do not [currently] pay for it via higher average revenue per user and/or conversion to pay subscribers, and having an ad-supported product should be helpful in this area.”
Another streaming stock recording big gains so far this year is Roku, which is up 42 percent on a Friday close at $63.96, or up by 1.5 percent or 96 cents on the day. That performance for the first half of the year was capped off by exclusive live sports coming to Roku as the streaming platform and CBS Sports inked a deal to become the U.S. media partners for Formula E, the motorsport series featuring electric racing cars.
All these stocks outperformed the broad-based S&P 500 stock index, which climbed 16.5 percent from January through June to end the week up $53.88, or just over 1 percent, at $4,450.20. Among Hollywood conglomerates, Warner Bros. Discovery, led by CEO David Zaslav, has been the strongest performer and also managed to beat the gain in the S&P 500. Its stock ended the first half of the year up 30.5 percent to close June at $12.54, up 12 cents or 1 percent on Friday.
WBD started 2023 by earning various upgrades and stock price hikes from analysts. While the jury on its streaming rebrand under the name Max is still out, its cost cuts and focus on driving its streaming business to profitability, which it expects to reach in the U.S. this year, earned plaudits on the Street. Goldman Sachs analyst Brett Feldman has designated it his favorite media stock with a “buy” rating and $21 stock price target. In a recent update on Goldman’s list of “conviction” stocks, the firm explained: “WBD represents something of a unique financial proposition in traditional media: a company that can materially grow earnings before interest, taxes, depreciation and amortization (EBITDA) over the next two to three years through synergy realization from the still-recent merger of WarnerMedia and Discovery — growth that should drive rapid deleveraging that appears to be underappreciated by investors.”
Others have been having a tougher time on the stock market.
Shares of Disney, for example, were virtually unchanged during the first six months of the year, closing Friday up 31 cents, or 0.3 percent at $89.26. That’s just 0.5 percent above the Mouse House’s 2022 closing price. Disney’s outlook has been much discussed on the Street given the various cost cuts and strategic changes, such as removing many shows from Disney+ and Hulu to bring down costs, pursued by returned CEO Bob Iger in recent months. Morgan Stanley analyst Benjamin Swinburne in early June reiterated his “overweight” rating on the stock despite a price target cut by $10 to $110. “Disney is in the midst of restructuring its media operations and earnings optimization will take time,” he explained. “However, we see the implied value of its content as too low here and remain overweight.” And SVB MoffettNathanson analysts Michael Nathanson and Robert Fishman, in a June 20 report, maintained their “outperform” rating, but reduced their stock price target by $7 to $120, writing: “It should be obvious by Disney’s stock price, weak subscriber data, and the recent inconsistent management comments about their streaming strategy, that the market has largely written off any optimism about where Disney’s direct-to-consumer operations can go. Given our historical doubts about these streaming business models, we completely understand that. Yet, we think there is a much better opportunity here than meets the eye.”
Meanwhile, Paramount Global’s stock saw a negative shift in momentum during the first half of 2023 as questions over its own streaming strategy persist. It gained around 30 percent in the first three months of the year after reporting strong streaming subscriber gains for 2022 and posting the biggest full-year film unit profit increase of all Hollywood conglomerates. But in its first-quarter earnings update, it cut its dividend to preserve cash in addition to layoffs and a broader restructuring. The result: Analysts expressed concern, and the stock ended the first half of the year lower. Its Friday closing price of $15.91 — down 8 cents or 0.5 percent on the day — means a drop of 6.5 percent in stock performance year-to-date.
Meanwhile, exhibition stocks have benefited this year from signs of a box office recovery, but were recently dragged down when Elemental and The Flash ran into box office troubles and recorded disappointing openings. Interestingly, their first-half performance differs significantly. Cinemark’s stock gained 97 percent over the first six months of the year, to get to a Friday close down 19 cents, or just over 1 percent, at $16.50. Elsewhere, shares in AMC Theatres parent AMC Entertainment edged up 10 percent at the year’s halfway stage to close Friday down 25 cents, or 0.6 percent, at $4.39 after unveiling a host of new ancillary revenue streams, including branded popcorn in Walmart stores.
In between the two, Imax Corp. shares rose year-to-date by 15.5 percent to a close down 30 cents, or 1.7 percent, at $16.99 at the end of June. B. Riley Securities analyst Eric Wold on June 26 published a report expressing support for movie theater stocks, titled “Theatrical Moviegoing Demand Demonstrates Strength in the Face of Two Duds and Lagging Post-Pandemic Film Slate Recovery.”
“The total quarter-to-date domestic box office of $2.575 billion through this past weekend represents an exceptional around 86 percent of the $2.986 billion that was generated through the same quarter-to-date period in 2019,” before the COVID pandemic, he wrote. “In our opinion, not only does this represent upside performance versus our projection that second-quarter industry box office would reach about 78 percent of second-quarter 2019 levels, but it represents the strongest quarterly indexing to pre-pandemic box office levels.” The B. Riley analyst reiterated his “buy” ratings on the shares of Imax and Marcus Corp.
“The box office recovery we got was not the one we wanted,” TD Cowen analyst Doug Creutz highlighted in the title of a June 20 report. “The disappointing performances of The Flash and Elemental … were ‘the last straw’ in cementing our belief that box office attendance will never recover to pre-pandemic levels, or even close,” he argued. “We believe this has negative implications for the theatrical footprint, which in turn is likely to put more pressure on box office performance.”
With the second half of 2023 expected to provide more challenges for the entertainment sector, investors will keep a close eye on opportunities and further risk.
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