Disney: Is The Content Gold Rush Over?
Over the last 6 months, there's been an interesting trend happening.
Stocks in media delivery networks, like Charter and Comcast, have done quite well, while shares of content companies, like Disney, Paramount, and Warner Bros, have deeply underperformed.
This performance lies in contrast to the "content is king" narrative that's been popular amongst investors over the last decade or so.
What's happening here?
There's 3 issues at play.
First up; the writer / actor strikes. These strikes have hurt content companies as they've introduced costs into the system. Either these will come in the form of opportunity cost as less profitable content gets made, or direct costs should Paramount, Netflix, or Warner Bros consent to the profit-share demands of labor.
Secondly, debt. This applies mostly to WBD, but to a lesser degree it impacts all of the content companies. Debt has reduced FCF across the board at these companies, which has led to a decline in both profits, and earnings multiples.
Finally, Business Strategy. Netflix changed the game in the 2010's as it pioneered a DTC video consumer model. As the company boomed, they began producing their own shows to the degree that the company is now a vertically integrated entertainment powerhouse. Other companies, like Paramount, lack the scale to achieve this. Thus, costs of running Paramount+ have skyrocketed, when it may have just been more profitable to license their final content products.
This approach allows for less bargaining power (due to the lack of customer relationship ownership), which is why it likely hasn't been pursued. However, things will likely switch back, which should lead to higher profits in the long run for shareholders.
Here at PropNotes, we believe that things are set to turn around. The DIS / CHTR spread has hit all time lows:
Once media companies realize that they can generate the same leverage in licensing negotiations by creating compelling content, the cash will begin to flow, and companies like DIS will continue to print money. This will take some time, but there's a potential trade here once the heiken ashi candles begin to print green. It's going to be a long, bullish trade once that happens.
Cheers!
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Stocks in media delivery networks, like Charter and Comcast, have done quite well, while shares of content companies, like Disney, Paramount, and Warner Bros, have deeply underperformed.
This performance lies in contrast to the "content is king" narrative that's been popular amongst investors over the last decade or so.
What's happening here?
There's 3 issues at play.
First up; the writer / actor strikes. These strikes have hurt content companies as they've introduced costs into the system. Either these will come in the form of opportunity cost as less profitable content gets made, or direct costs should Paramount, Netflix, or Warner Bros consent to the profit-share demands of labor.
Secondly, debt. This applies mostly to WBD, but to a lesser degree it impacts all of the content companies. Debt has reduced FCF across the board at these companies, which has led to a decline in both profits, and earnings multiples.
Finally, Business Strategy. Netflix changed the game in the 2010's as it pioneered a DTC video consumer model. As the company boomed, they began producing their own shows to the degree that the company is now a vertically integrated entertainment powerhouse. Other companies, like Paramount, lack the scale to achieve this. Thus, costs of running Paramount+ have skyrocketed, when it may have just been more profitable to license their final content products.
This approach allows for less bargaining power (due to the lack of customer relationship ownership), which is why it likely hasn't been pursued. However, things will likely switch back, which should lead to higher profits in the long run for shareholders.
Here at PropNotes, we believe that things are set to turn around. The DIS / CHTR spread has hit all time lows:
Once media companies realize that they can generate the same leverage in licensing negotiations by creating compelling content, the cash will begin to flow, and companies like DIS will continue to print money. This will take some time, but there's a potential trade here once the heiken ashi candles begin to print green. It's going to be a long, bullish trade once that happens.
Cheers!
Looking for more high-probability trade ideas? Follow us below. ⬇️⬇️
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