Morgan Stanley's media picks: Looking for revenue bounce, enjoying consumer demand
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An omnibus look at entertainment, streaming and advertising has Morgan Stanley picking its stocks based on sector-specific factors, including consumer demand, lagging valuation and the ever-present headwinds on the macro economy.
When it comes to streaming, the next big catalysts are the ad-supported service tiers rolling out at heavyweights Netflix (NASDAQ:NFLX) and Disney+ (NYSE:DIS), the analyst team of Benjamin Swinburne, Brian Nowak and Thomas Yeh notes.
Disney+ (DIS) is launching its ad tier Dec. 8. Netflix has been publicly saying it would be early 2023 before its ad-supported level emerged, but it's looking increasingly likely that it wants to beat Disney, by rolling out Nov. 1.
Both companies' plans should let them drive average revenue per user without relying exclusively on price increases, the team says, and allows for tapping into strong advertiser demand for their audiences.
They're staying Equal Weight on Netflix (NFLX), though, amid what looks like fair value and some concerns about whether the company can achieve 2023 subscriber goals. Consensus already expects ARPU to grow mid-single digits for the "foreseeable future," while net adds will double year-over-year in 2023 "all while content spending growth is moderating."
The firm is Overweight on Disney (DIS), though, thanks to the high-multiple Parks segment driving most EBITDA and free cash flow, even as the content assets are "under-earning and undervalued." The quality of the streaming product will improve as a result of content amortization that will grow from $5B in fiscal 2022 to more than $9B in 2024.
Turning to linear TV, the group notes trends are under growing pressure, with distribution revenues slowing to 2-3% growth this year. As companies navigate those rough seas, Morgan Stanley is staying Equal Weight on Warner Bros. Discovery (WBD) and Fox (FOX) (FOXA), but Underweight on Paramount Global (PARA) (PARAA), which has the highest exposure to linear TV and is already at a premium multiple.
Live Entertainment and Sports trends are "strong and stronger than expected," and continuing inflation of sports rights costs should be a tailwind for its top pick in the space: Endeavor Group (NYSE:EDR). That trend should also benefit Formula One Group (FWONA) (NASDAQ:FWONK), on which the firm is Overweight, as well as World Wrestling Entertainment (WWE), where it's Equal Weight.
Advertising, meanwhile, is a "mixed bag" for trends, the group says. Video ad trends surprised to the downside, notably in streaming - the firm is Underweight Roku (ROKU) - but there was better than expected growth for sports and news (ESPN (DIS), and Fox Sports and Fox News (FOX) (FOXA)). Streaming music looks "more resilient" than streaming video to the macro headwinds, so accelerating growth in 2023 should help Warner Music Group (WMG) re-rate given a discount to Universal Music (OTCPK:UNVGY), the firm said.
The firm's top pick in Advertising - and indeed in the Internet sector overall - is Amazon.com (AMZN). The analysts point to improving retail profitability, but also an annual $38B performance-driven ad business, expected to grow at about a 22% rate from 2022-2024 with connected TV and video call optionality.
The analysts' price targets for Alphabet and Meta Platforms suggest some solid upside - its GOOGL target of $145 implies , and a $225 target on META implies upside - but on Alphabet, it's about 1% below Street expectations on revenue and 3% below on EBITDA, while Meta is facing headwinds on its short-video Reels that may take "multiple quarters" to turn around, and it's below Street consensus for 2023.