Wells Fargo analyst Marci Ryvicker noted that many think traditional media is in trouble, but she didn’t simply say that Wells Fargo is not in this camp. She practically pulled out a bullhorn, climbed a tower and shouted “WE ARE NOT IN THIS CAMP.” Her lead sentence in a recent release is, “We are bullish on media and rate the diversified entertainment sector Outperform.”
She said the evidence is there that big traditional media companies are in control of must-have content, and that they will be able to monetize it through retransmission consent and reverse compensation, among other things.
Ryvicker noted, “We also realize that some of these stocks have outperformed year to date. However, with increasing evidence to support the long-term secular health of content creation coupled with renewed focus on capital returns over ‘empire building,’ we would argue that the terminal growth expectations for some of these companies may be too conservative. We are initiating coverage of the diversified entertainment sector with an Outperform rating. Our company-specific ratings include Outperform-rated NWSA, TWX, and CBS; and Market Perform-rated VIAB and DIS.”
Other developments are positive. “Authentication is real,” said Ryvivker. “We are seeing signs that the authentication/TV everywhere model is not only real but gaining momentum, which does several things: (1) underscores the partnership between content and distribution; (2) provides visibility for both parties (which makes us somewhat less concerned about rising program costs, specifically as it relates to sports); and (3) satisfies a consumer need/want without compromising monetization.
It is also seen as a positive that content creators are taking better care of their product – making sure it doesn’t get out too far too soon. Another positive is a “disciplined” approach to the use of free cash flow.
The biggest risk is the economy tanking again – something beyond anybody’s control. Otherwise, Wells Fargo is high on entertainment stock.