Investors in Fox News have always known the company as a dominant force in U.S. politics. For the past five years, America’s most-watched basic cable company has raked in viewers, even as consumers have increasingly turned to streaming services. But behind these successes trouble lies ahead for both the company and Fox Corp (NASDAQ:FOXA) stock.
It was always a grand bargain at Fox News: a delicate balance between strait-laced news reporting and free-wheeling opinion. And it was a trick that Roger Ailes, the firm’s now-disgraced former CEO, managed to pull off with enviable skill. But without anyone to continue that work, Fox News is starting to tilt toward more extreme opinions, alienating the very viewers that made Fox a success.
So, unless something changes, investors should consider selling FOXA stock and finding greener pastures.
FOXA Stock: Beholden to Fox News
It’s not the first time I’ve written on Fox News. Earlier this fall, I recommended buying the company as the 2020 election kept viewers glued to their televisions. Shares have since risen 12% to 15%. But several internal changes at Fox News have turned me bearish about the network’s long-term outlook. And even the best long-term performers can quickly get mismanaged into oblivion.
Perhaps that ball started rolling four years ago when the company forced out Ailes over serious allegations of sexual misconduct. But it was only in mid-January where interim management started losing control of the ship. In a major reshuffle, the company fired longtime political editor Chris Stirewalt, whose team correctly called Arizona for Joe Biden during the 2020 election.
The firm also announced a series of lineup changes that replaces its 7 p.m. news hour with an hour-long opinion segment. Meanwhile, Fox News staples Sean Hannity and Tucker Carlson have arguably become far more extreme in their positions in the post-Trump era, creating concerns that they could alienate the very Americans who put them there in the first place.
All this spells trouble for Fox. Though most networks face a viewership slump the year following a presidential election, Fox’s sudden collapse from first to third place should raise eyebrows (if not red flags).
How Much Does Fox News Matter to FOXA?
Though cable news makes up just half of Fox Corp’s revenues, the segment makes up almost all its excess returns. Operating return on assets, a measure of profitability, averages 28%. Fox’s local TV stations, meanwhile, generally struggle to break even.
Even within Fox’s cable news segment, the company has struggled with growth. Its other two offerings – Business and Sports – saw declines through FY 2020, making the company ever-more reliant on its Opinions segment than ever.
And that’s not a good sign. By replacing news reporting with opinion, Fox stands to lose mainstream viewers to more moderate sites. Meanwhile, its zanier opinion hosts have failed to stem the tide of OANN, Newsmax, and other even further-right news sites.
What’s FOXA Worth?
Investors should give pause to a company that’s too conservative for mainstream viewers but increasingly not extreme enough for those on the far-right. Though its diversified mix of news,opinion, sports and business should provide some short-term stability, it won’t hide Fox’s rudderless leadership forever.
The company’s founder, Rupert Murdoch, is also aging. At almost 90 years old, the family patriarch wisely simplified his business last year, selling off Fox’s more complex film and TV production business to Walt Disney (NYSE:DIS) in a massive $52.4 billion deal. It was almost in recognition that he could no longer manage such a sprawling empire. Since then, he has ceded much influence to his eldest son, Lachlan Murdoch – perhaps a talented businessman in his own right, but not the superstar his father once was.
Investors have already bid down Fox shares in anticipation of lower prices. The company recently traded at just 11 times P/E, and 7x EV/EBITDA, making it even cheaper than embattled ViacomCBS (NASDAQ:VIACA).
Even discounted cash flow models show the company as cheap. Consensus estimates peg Fox’s value at almost $50, a 65% upside. Yet, few analysts believe that Fox can maintain its numbers for long. The average price target has fallen from $40 at the start of 2020 to just $32 today.
What to Do with FOXA Stock?
Investors who bought Rupert Murdoch’s company in 1995 would have almost doubled the S&P 500’s return – an impressive feat for a company in the slow-growing world of cable news. And even now, investors who don’t mind Fox News’ impact on U.S. politics (or even celebrate Fox News) would find a high-returning company with tempting valuations to match.
But if you’re like most mainstream Americans, you’re likely starting to see the company’s problems in reporting the news while mixing in opinion. It’s a balance that Rupert Murdoch and Ailes managed for decades, building up Fox as the No. 1 cable news network in America. But Fox has turned into a near-sighted company, chasing ratings today, no matter the cost to its reputation tomorrow. This once high-quality company is starting to look worryingly stale. Investors beware; unless Fox’s management gets back control of their ship, there’s a long way for the stock to sink.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
