Hollywood Stocks First Half 2024 Review

TikTok and artificial intelligence are booming. Removing streaming services reduces linear TV profits. The advertising market is plagued by serious questions. Hollywood management teams, warned by Wall Street about the profitability of streaming, are seeking further cost cuts and possible mergers and asset sales to optimize asset portfolios.

Tough times for media and entertainment stocks have investors mostly wary of the ability of industry giants to achieve sustainable streaming profits by balancing reduced content spending with growth and expansion. subscriber loyalty.

The result is that many entertainment giants' stocks are of the “show me the stories” variety, with a wary Wall Street waiting for evidence that the decline in traditional media businesses will stop or even reverse and that top executives can make new business segments and operating models work.

With investors avoiding uncertainty, the first half of 2024 has been mixed for Hollywood stocks. Expect lots of talk about where to go and what to do next to make a business strategy work when industry CEOs and their tech brethren descend on Sun Valley, Idaho, for the annual gathering of Allen & Co., also known as Summer Camp for Moguls.

Paramount Global is a perfect example: despite its big franchises, a heavily indebted studio saw its shares take a big hit in the first six months of the year. And this, after majority shareholder Shari Redstone studied and then rejected an offer from David Ellison's Skydance Media, which failed. That leaves the new trio of CEOs – Chris McCarthy, George Cheeks and Brian Robbins – at the helm of the studio after the ouster of CEO Bob Bakish to convince employees and investors that Paramount Global can grow again. Shares of the studio closed down 28% for the year so far on Thursday.

Warner Bros. Discovery, whose CEO David Zaslav and his team are also focused on reducing debt and boosting profits from streaming and prized assets like Warner Bros., CNN and Harry Potter, was another big loser in the first half of 2024. The sprawling conglomerate’s CFO Gunnar Wiedenfels cited cost cutting as part of a turnaround scenario, with investors spooked by management’s lack of full-year financial guidance after recently reporting first-quarter results. The stock was down by market close 37 percent since the beginning of the year.

Even media, entertainment and technology giant Comcast has not been immune to a series of daily stock declines, shedding 12% of its market value since late 2023 as it faces calls for its Peacock investments to turn a profit. As a demonstration, Comcast, a major U.S. cable and internet player, is hoping the show will begin with NBCUniversal’s coverage of the 2024 Summer Olympics in Paris, which kicks off July 26.

Of course, investors are often in a wait-and-see mood when they have no idea about the future of a struggling stock. Take AMC Networks, home to cable networks such as AMC and streamers such as Shudder. That company's shares fell 52 percent in the first six months of the year as it faces a tough advertising market, restructuring costs and other headwinds.

There have been some bright spots in the media sector, though. At Walt Disney Co., CEO Bob Iger has fended off dissident shareholders in a proxy fight. And the conglomerate’s latest quarterly results have given investors confidence that it is nearing streaming profitability for its combined direct-to-consumer businesses of Disney+, Hulu and ESPN+.

But the stock fell following the earnings report, amid some questions about trends at the theme park units and its linear TV business, which is facing declining revenue and a decline global audiences. Still, Disney shares finished the first half up 12 percent.

And shares of Fox Corp., where this election year is spotlighting the heavyweight Fox News, are up 13 percent year to date. Investors are also seeing a boost in its stock from its upcoming sports streaming bundle with Warner Bros. Discovery and Walt Disney and the performance of its Tubi platform.

By comparison, the broad S&P 500 stock index is up 15.6% so far in 2024, meaning many big entertainment stocks have underperformed it.

“The entertainment industry faces many challenges, ranging from changing consumer behavior to significant changes in advertising spending to deflationary pressures from streaming,” MoffettNathanson analysts wrote in a June 26 report after a trip to Los Angeles. “All of this has led to a decline in the profitability of traditional media companies and the emergence of new and formidable competitors. Today, firmly engaged in the third act of the streaming wars, we expect industry consolidation, reduced spending on scripted content, ever-higher spending on live sports, and a return to third-party content licenses.

The trip didn't change their views on major stocks in the sector, as they reiterated their “buy” ratings on Disney and Fox, their “sell” rating on Roku and their “neutral” ratings on Netflix, Paramount, Warner Bros. Discovery, AMC Networks and Cinemark.

“In Search of Growth: Balancing Emerging Opportunities with Secular Headwinds” is the fitting title of Bank of America analyst Jessica Reif Ehrlich’s June 6 report on the state of media. “Media companies are trying to find emerging growth areas in the face of secular headwinds,” she explained.

The BofA financial expert highlighted several areas of media activity. “After a prolonged period of weakness, cautious optimism is returning to the advertising market,” she suggested. “A better economic and inflation outlook has led to an improvement in the advertising market since the first quarter. Continued recovery will depend on consumer health.”

Reif Ehrlich also highlighted: “Under the surface, there is a significant disruption in the advertising market, driven by the secular decline of linear TV, the rise of AVOD platforms and the shift of a greater share of sports programming to streaming. This trend was highlighted from the outset, where presentations were geared towards digital capabilities.

In a May 29 report titled “Accelerating – Reconsidering Our Investment Outlook,” Morgan Stanley analyst Benjamin Swinburne also took a closer look at the state of media and entertainment. “As we analyze the first quarter results and look ahead to the second half of 2024, the pace of media disruption is accelerating,” he concluded. “In this context, we remain 'overweight' on Netflix, as strong double-digit revenue growth can extend beyond the benefits of paid sharing. We view the declines in Disney and Cinemark, rated “overweight,” as opportunities,” and he maintained “underweight” ratings on Paramount and AMC Networks.

As the industry continues to “take advantage of the opportunities presented by the growth of streaming and the decline of traditional pay TV,” Swinburne highlighted several trends. “Peak TV is over, can sports inflation continue? he asked, for example. “Currently, spending on scripted television appears to be down, film production is up, and the value of sports rights (at least as demand for the NBA indicates) remains healthy,” the analyst summarizes. “Sports spending remains a minority in overall content budgets, at least theoretically supporting the potential for continued healthy rights inflation. Long term, we continue to view sports as a particularly attractive asset class.

The Morgan Stanley expert also ended on an optimistic note, reminding investors that “media is cyclical.” His take: “As we look ahead to the remainder of 2024, we are generally optimistic about the state of the American consumer and the advertising market.”