Bernstein's jump into media favors Disney, WBD; looks down on Paramount
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Bernstein initiated coverage of several media and telecom stocks with a favorable eye toward a couple of old-media stalwarts, in what the firm calls "interesting" times for the space.
"There has never been a more interesting time to initiate coverage of Media and Telecom," analyst Laurent Yoon and team said. Subscription video-on-demand, at first a "cheap complement" to pay TV, "became a cheap and compelling alternative and drove cord cutting which continues without an end in sight. Linear monetization model is in a free fall and MediaCos can't raise affiliate fees fast enough to offset subscriber decline."
"Roughly a decade into the decline, my young associates do not understand how cable remotes work and that pretty much sums up the future of Pay TV as-is," he added. "Try explaining the cable bill to a 'Gen Z.' "
There's no shortage of debates in the space, and the criss-crossing themes led the team to start Walt Disney (NYSE:DIS) and Warner Bros. Discovery (NASDAQ:WBD) at Outperform, and launch coverage of Paramount Global (NASDAQ:PARA) (NASDAQ:PARAA) at Underperform.
When it comes to Disney (DIS), a key theme going forward is the story around the decline of linear TV and the transition to direct-to-consumer content, which are "well-established narratives," Yoon said: The key to future growth and profit lies in getting past that curve and yet having the scale for profitability.
Disney is "the only credible challenger to Netflix (NFLX). Oh, plus Parks," Yoon says, noting the company should command a premium as a stable growth story. He has a $103 price target, implying 24% upside.
Warner Bros. Discovery (WBD) scores well on a couple of other debates: an "unsustainable" industry structure that means persisting consolidation overhangs, and the fact that "de-levering alone is insufficient" and must be complemented with fundamentals driving cash-flow growth.
Despite secular headwinds, WBD should generate sufficient cash flow to "substantially" de-lever -- "exiting 2024 at ~3.5x net debt/EBITDA, and ~3x by EY2025," leading to some 30% potential upside to equity value in 2025 along the way. Yoon and team have a $13 price target, implying 26% upside.
Paramount (PARA) (PARAA), meanwhile, is "not pretty and looking for a savior," the firm said. "PARA is facing a triple whammy â (1) linear decline, (2) sub-scale DTC, and (3) a poor balance sheet."
"We are bearish versus consensus on PARA's affiliate fee and advertising revenues but bullish on their licensing revenue. However, licensing tailwind is insufficient to offset Linear decline," he added. He has an $11 price target on PARA, implying 7% downside.
The firm also initiated coverage at Market Perform of Fox (FOX) (FOXA), Netflix (NFLX), Comcast (CMCSA) and Charter Communications (CHTR).

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