Why Are Entertainment Stocks PARA and DIS Down Today?

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  • Mass media conglomerate Paramount (PARA) posted deeply disappointing earnings.
  • Other entertainment stocks, including Disney (DIS), suffered a hit due to digital ad implications.
  • A writers’ strike also complicates the declining demand framework.
entertainment stocks - Why Are Entertainment Stocks PARA and DIS Down Today?

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Entertainment stocks suffered a hefty blow as mass-media conglomerate Paramount (NASDAQ:PARA) delivered deeply disappointing earnings results. Primarily, a weak advertising market represented the main culprit of the red ink, forcing management to cut its dividend. Sector rivals, including Disney (NYSE:DIS), fell sharply in sympathy. Adding to rising headwinds on the horizon is a writers’ strike, which may impact content quantity and quality if left unaddressed.

According to Seeking Alpha, PARA suffered its worst intraday decline in well over a year. However, entertainment stocks such as Comcast (NASDAQ:CMCSA), Sirius XM (NASDAQ:SIRI) and Lions Gate Entertainment (NYSE:LGF-A, NYSE:LGF-B) felt the heat. In particular, while Paramount posted a 39% increase in direct-to-consumer revenue, the company’s streaming unit’s operating income dropped because of higher supporting costs.

Worryingly, Paramount’s television advertising revenue incurred a double-digit loss. Here, the main culprit centered on a weaker market for entertainment stocks, forcing enterprises to reduce their ad spending.

Overall, Reuters reported that Paramount missed its first-quarter revenue target of $7.42 billion. Instead, the company only managed to ring up $7.27 billion on the top line. Notably, sales from Paramount’s filmed entertainment business dropped 6%.

As if these challenges weren’t enough, Paramount cut its dividend to 5 cents per share. Management stated that this action will result in approximately $500 million in annualized cash savings.

Entertainment Stocks Also Suffer From the Writers’ Strike

Adding to the woes for entertainment stocks — particularly for the long term if circumstances remain contentious — is the Hollywood writers’ strike. On paper, sentiment appears favorable to the writers, who quietly undergird the content society consumes. “What the writers are asking for is not unreasonable,” said NBC’s Late Night show host Seth Meyers.

However, as Yahoo Finance senior reporter Alexandra Canal mentioned, the situation is complex. “Streaming shows often have fewer episodes and less residual income compared to traditional network television, which often means less money in the pockets of writers,” wrote Canal.

The report also stated that most studios no longer operate as “pure play” production houses. Instead, they have their own streaming divisions. This presents a vexing challenge because of mounting direct-to-consumer losses.

Naturally, this framework bodes negatively for entertainment stocks like Disney, which aggressively pivoted toward streaming. Now, the Hollywood industry must deal with a harsh reality check.

Additionally, the Covid-19 pandemic may have overstated the accelerative potential of streaming services. With cooped-up consumers ready to resume previously denied activities — the “revenge travel” phenomenon — not resolving the strike quickly may leave a devastating content gap in film and television releases for next year.

Why It Matters

For now, production studios stand ready to mitigate the impact of the writers’ strike. For Paramount specifically, its leading position in reality and unscripted content can hold the fort. However, if the strike lasts longer than expected, it may pose a sizable impact on Paramount’s financials.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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