The novel coronavirus has disrupted the world in a way that we have never seen before. Given the many unknowns from its spread, governments had no choice but to shut down borders, close businesses and order everyday citizens to stay at home. If it were not for the Federal Reserves’ actions in boosting liquidity, the stock market would have fallen more. Still, the pandemic paused many sectors of the economy. One segment that is still likely growing its audience is the media space. By extension, media stocks may recover.
People need to watch the news to know the status of the pandemic daily. There are seven media stocks whose online and television audience levels will likely increase as the pandemic plays out. The companies include:
- Comcast (NASDAQ:CMCSA)
- Disney (NYSE:DIS)
- Fox (NASDAQ:FOXA)
- Charter Communications (NASDAQ:CHTR)
- Twitter (NASDAQ:TWTR)
- Roku (NASDAQ:ROKU)
- AT&T (NYSE:T)
These firms offer streaming content that will keep their viewers distracted while at home. Some of these companies run television channels that supply timely news about the virus. And after the bear market started over a month ago, these stocks are all trading at sharp discounts from their 52-week high. In the case of AT&T and Charter, mobile data and voice usage will increase. Demand for cable internet bandwidth will increase, too. That is because all that online activity in offices now occurs at home. With the viewership on an uptrend likely to continue in the near-term, what returns should investors expect from these media stocks?
Media Stocks to Buy: Comcast (CMCSA)
Comcast owns NBCUniversal. Before the lockdown in the U.S., NBC News broke the record with the most-watched democratic debate ever. And even though February feels like an eternity ago, its YouTube channel gets many coronavirus update posts that bring in nearly a million views.
Comcast will not earn advertising revenue from the Olympics now that it is delayed until next year. That loss is only temporary: the company will book such revenue later. Conversely, CMCSA stock is down in 2020 as it discounts lost advertising revenue. This is in stark contrast to 2019 results, in which the company reported record free cash flow of $13.4 billion. It also raised its dividend by 8 cents to 92 cents.
Last year, NBCUniversal reported an adjusted EBITDA of $833 million, up 13.5%. It achieved its third most profitable year in its history, and NBC’s lower advertising revenue in 2020 will prove temporary. Eventually, businesses will slowly open again and will resume ad spending on the network.
With the stay-at-home order in effect, Comcast’s cable internet demand should grow. In the fourth quarter, it added 372,000 customers. Cable communications revenue grew 2.6% to $14.8 billion. In the current quarter, the company may report growth in these services as the consumption of content at home increases.
In a 5-year discounted cash flow model, assume that revenue grows by at least 1% annually. Further with the following assumptions below, CMCSA stock has a fair value of ~$41.
|Discount Rate||8.0% – 7.0%||7.50%|
|Terminal Revenue Multiple||1.9x – 2.9x||2.4x|
|Fair Value||$30.55 – $51.83||$40.97|
Data courtesy of finbox.io
Disney Television owns sports channels ESPN and ABC. Although many major sports events are canceled, hurting ESPN revenue, Disney’s ABC channel will thrive at this time. For the week of March 23-29, NBC was in second place. The channel brought in an average of 4.72 million viewers. Some of the most-watched shows include Chicago Med, The Voice and the drama Council of Dads.
In the movie space, Disney’s film release schedule will get delayed. This will hurt short-term revenues for the quarter. But if movie theaters re-open later on, the company should have some box-office hits in the books. For example, Mulan is a live-action film that may open in theaters on July 24. Black Widow is now set for release on Nov. 6. Long-term investors holding DIS stock will get rewarded in 2022. Captain Marvel 2 will be released on Jul. 8, 2022. And Black Panther 2 will play on May 6, 2022.
Investors should not forget that Disney+, a streaming service costing $12.99 a month, attracted strong viewership thanks to The Mandalorian. When it releases the second season, the company should expect an increase in Disney+ signups.
In the second quarter, Fox reported second-quarter fiscal revenue growing 5% to $3.78 billion. The company benefited from higher affiliate revenue growth of 7%. Advertising revenue grew by 1%. Conversely, given the sharp drop in FOXA stock in the last few weeks, markets are signaling low expectations from advertising revenue. But the coronavirus pandemic will likely lead to a sharp increase in viewership for Fox News.
In the last quarter, the company enjoyed being the No. 1 position for the Fox Network and broadcast. It was also in the No. 1 position with Fox News. Management said that “our first half results illustrate the power and importance of our brands to our partners and audiences, validating our strategy to build Fox around live sports, live news and event programming.”
Just as Disney’s ESPN will suffer from a lack of live sports, Fox may offset the drop in sports viewership with its news coverage. And when advertisers increase their spending, they will choose the Fox network because of the growing audience base.
Charter Communications (CHTR)
A growing need for cable during such times will give Charter Communications a lift. In the fourth quarter, the adjusted EBITDA in the company cable unit grew 8.9% from last year. Net residential customers grew from 26.3 million to 27.3 million. Mobile lines grew by 171,000 while residential internet users increased by 24,000. Both services will likely grow as consumer demand increases during the stay at home order.
Charter’s advertising revenue, which fell 22.7% from last year, may continue falling. In Q4/2019, Charter had lower political revenue. Later on this year, this may bounce back as politicians resume their advertising spend.
Charter’s disciplined capital deployment strategy, along with lower capital intensity, should push free cash flow growth higher. Improvements in its cable margin should give the current quarter a lift. The company said that its higher average revenue per user (ARPU) is sustainable. Thanks to its programming and good customer relationship, expect EBITDA to grow at a faster pace than its revenue growth.
Despite withdrawing its first-quarter guidance due to the COVID-19 impact, the microblogging giant is more important to society now than ever. The site enables users to post pandemic-related news in real-time.
Operationally, Twitter said that first-quarter revenue will fall. It will also report a GAAP operating loss. Costs for improving the product will hurt near-term results, but are ultimately beneficial for all users. Already, Twitter has a monetizable daily active user (mDAU) of around 164 million. This is up from 134 million in the year-ago period.
Twitter’s Chief Financial Officer said that “The COVID-19 impact began in Asia, and as it unfolded into a global pandemic, it has impacted Twitter’s advertising revenue globally more significantly in the last few weeks.” Investors should model lower revenue in the near-term, but growth later on this year. In this scenario, Twitter stock is worth at least $27 a share in a 5-year discounted cash flow revenue exit model (per finbox).
A surge in streaming video, as a result of most people staying home, will give a lift to the Roku ecosystem. In the last few quarters, Roku benefited from consistently strong sales of Roku-powered flat-screen televisions. The firm had 32.3 million monthly active users up until Q3/2019. Chances are good that since March, Roku usage grew sharply.
Consumers, hungry for television and movie content, likely switched Roku on. It also added hundreds of hours of free HBO shows, movies, and Sesame Street episodes. This benefits Roku in two ways. First, viewership will grow immediately, even though revenue may not. Second, user habits may change as consumers head to Roku to access the content. In the longer-term, a higher audience base will boost advertising revenue and subscription sales.
AT&T’s HBO video streaming service might get a lift after the company offered HBO NOW and HBO GO for free. On the cable television front, coverage of the pandemic lifted the viewership for CNN. The channel sharply increased its primetime audience. For example, from March 16-20, CNN’s viewers per day almost doubled to 790,000.
The telecom giant also reported an “uptick in kids, family and news viewership.” The company benefited from school closures as demand for kids entertainment increased. So, when schools eventually open again, viewership habits in the children age group may change to AT&T’s benefit. AT&T TV and DIRECTV offered movies like Frozen II and Spies Like Us that suited families. In the months ahead, it may tweak its programming to target a family audience.
AT&T’s debt may give bears a reason to sell the stock. But after the Fed cut interest rates to 0%, the telecom giant may refinance its upcoming debt, lowering interest rate costs. Plus, with HBO’s growth ahead and a resumption in movie releases from Warner Bros., the company has strong long-term prospects.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, he did not hold a position in any of the aforementioned securities.