The Broadcast Radio and Television Industry: Adjusting to New Viewing Habits
The Zacks Broadcast Radio and Television industry is facing challenges from increasing cord-cutting while also experiencing a notable rise in demand for streaming content. Companies like Netflix NFLX, Fox FOXA, Roku ROKU, and TEGNA TGNA are capitalizing on the growing consumption of digital content. Their success stems from a wide variety of offerings, including original productions and short-form content that appeals to viewers on smartphones and tablets. Enhanced Internet speeds and technological progress have further bolstered these companies. Despite modest advertising revenue growth, strategies focusing on profit protection and efficient cash management are crucial for these businesses as they seek to enhance top-line growth.
Understanding the Industry
The Zacks Broadcast Radio and Television industry represents entities that deliver entertainment, sports, news, and music through television, radio, and digital media. Revenue comes from selling TV and radio programs, ad slots, and subscriptions. As technology evolves and the demand for virtual reality and internet radio increases, firms are ramping up investments in research, development, sales, and marketing efforts to remain competitive. A shift towards a variable cost model will likely help these companies reduce fixed expenses and enhance their flexibility in response to changing market conditions.
Four Key Trends in Broadcast Radio and Television
Changing Consumer Preferences Drive Innovation: In response to the shifting landscape, companies are broadening their content portfolios for over-the-top (OTT) services while still maintaining traditional linear TV. Streaming services provide the opportunity to connect with a global audience, attract more advertisers, and grow advertising revenue. Tools that measure return on investment (ROI) for advertisers are also becoming essential in optimizing ad spend. Major events, including the NFL, NHL, Olympics, and European Games, play a crucial role in generating advertising income.
Digital Viewing Increasingly Influences Content Creation: Many companies are either launching or acquiring their own OTT services to leverage consumer insights for tailored content delivery. The boom in digital viewership allows for a wealth of consumer data, enabling the use of artificial intelligence (AI) and machine learning to craft targeted programming. This strategy not only engages users but allows companies to adjust pricing strategically without risking subscriber loss.
Macroeconomic Challenges Affect Production and Advertising: Advertising serves as a vital revenue stream for the Broadcast Radio and Television industry. However, players in this sector are facing high inflation, rising interest rates, and a competitive ad market, which are putting pressure on ad budgets. These economic conditions are expected to hinder revenue growth for industry firms in the near term, particularly as tech and social media companies compete aggressively for advertising dollars.
Impact of Low-Cost Bundle Offerings on Revenues: The trend toward cord-cutting has led to the rise of “skinny bundles,” which offer a limited number of channels at a lower price than traditional subscriptions. This shift caters to changing consumer habits as mobile and internet technologies continue to evolve. While these bundles help retain viewers, they may negatively impact overall revenue growth.
Industry Outlook and Ranking
Currently, the Zacks Broadcast Radio and Television industry is part of the larger Zacks Consumer Discretionary sector, holding a Zacks Industry Rank of #184, which is in the bottom 27% among over 250 Zacks industries.
This low ranking indicates poor near-term prospects, as evidenced by the negative earnings outlook among companies within this group. Since November 30, 2023, earnings estimates for 2024 have decreased by 94.7%, reflecting analysts’ concerns about future growth.
Despite these challenges, some stocks have the potential to outperform the market, based on strong earnings forecasts. However, it is essential to first consider the industry’s performance and valuation metrics.
Industry Performance Compared to Sector and S&P 500
Over the past year, the Zacks Broadcast Radio and Television industry has outperformed both the broader Zacks Consumer Discretionary sector and the S&P 500 Index.
The industry has experienced a gain of 42.4%, surpassing the S&P 500’s increase of 30.7% and the broader consumer sector’s rise of 14.9%.
One-Year Price Performance
Current Valuation Insights
The industry currently trades at a trailing 12-month EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) multiple of 13.32X, juxtaposed with the S&P 500’s 17.09X and the sector’s 9.9X.
Over the last five years, the industry’s valuation has fluctuated between a high of 19.76X and a low of 9.3X, with a median valuation of 4.61X, as illustrated in the accompanying chart.
EV/EBITDA Ratio (TTM)
Notable Stocks to Watch in the Industry
Netflix: This Zacks Rank #2 (Buy) company continues to see gains from a rising subscriber base, backed by a strong selection of content.
Netflix Leads Streaming Industry with Impressive Subscriber Growth
Company’s New Strategies Enhance Engagement and Revenue Potential
Netflix continues to bolster its financial performance through various initiatives, including stricter measures against password sharing, an ad-supported subscription tier, and increased prices for select plans. As of the end of the third quarter, the streaming giant reported 282.72 million paid subscribers worldwide, representing a growth of 14.4% compared to the previous year.
The company’s diverse content library, driven by substantial investments in localized and foreign-language productions, supports its growth trajectory. Additionally, Netflix’s expanding gaming portfolio is expected to further enhance user engagement in the coming months.
Looking ahead, Netflix forecasts a revenue increase of 15% year over year for 2024, aligning with the upper end of its previous guidance of 14-15% growth. For 2025, the company anticipates revenues to range from $43 billion to $44 billion, indicating an increase of 11-13% from the projected total of $38.9 billion for 2024. This growth is expected to come from rising paid memberships and average revenue per member (ARM). Netflix’s advertising segment is also poised for substantial growth, with ad revenues anticipated to nearly double in 2025 compared to the previous year.
The Zacks Consensus Estimate for Netflix’s 2024 earnings has recently risen by 3.7% to $19.78 per share within the last month. As of now, NFLX’s stock has surged by 56.9% since the start of the year.
Price and Consensus: NFLX
Roku: This Zacks Rank #3 (Hold) company is gaining from increased user engagement on The Roku Channel and the success of the Roku TV program. In the third quarter, The Roku Channel was the #3 app on the platform in terms of reach and engagement, with streaming hours increasing nearly 80% year over year.
The Roku operating system (OS) continues to dominate the market, being the #1 selling TV OS in the United States, with sales exceeding those of the next two competitors combined. Additionally, the Roku OS holds a similar position in Mexico and Canada.
Roku’s streaming households now total 85.5 million, marking a net increase of 2 million since the second quarter of 2024. The Roku Home Screen reaches over 120 million U.S. households daily, indicating enhanced user interaction and opportunities for monetization. The addition of third-party streaming services such as Peacock, Disney+, and HBO Max is positively impacting user growth due to Roku’s large and engaged audience and promotional capabilities.
The Zacks Consensus Estimate for Roku’s 2024 loss has narrowed by 34 cents to $1.10 per share over the last month. However, the stock has experienced a decline of 24% year to date.
Price and Consensus: ROKU
Fox: The company experiences growth from the rising demand for live programming, especially in its Fox News and Fox Business Network segments. The recent launch of Tubi in the United Kingdom, which boasts over 20,000 movies and TV episodes, is expected to expand the user base significantly.
This Zacks Rank #3 company earns a substantial amount of advertising revenue from live programming, which generally faces less competition from subscription-based video-on-demand services. Fox has strengthened its partnership with The Trade Desk, allowing for superior innovations in advertising targeted at specific audiences while enhancing campaign performance tracking. Increased local advertising expenditure is also a significant benefit for Fox, as is the rise in affiliate-fee revenues that should further support its financial performance.
The Zacks Consensus Estimate for Fox’s fiscal 2025 earnings has inched up by one penny to $3.70 per share over the last month, with the stock gaining 46.9% year to date.
Price and Consensus: FOXA
TEGNA: This company has become one of the largest broadcasting groups in the United States and a leader in providing local news and media content, primarily through a series of acquisitions. TEGNA’s broadcast stations, including NBC, CBS, ABC, and FOX, operate under long-term affiliation agreements. They not only sell commercial advertising but also produce local programming, including news, sports, and entertainment.
TEGNA’s strategy of focusing on content creation rather than traditional TV broadcasting helps diminish risks associated with the ongoing decline in the U.S. Pay-TV market. It capitalizes on live event programming, which remains highly popular among viewers, allowing it to sell content to various platforms including TV channels and streaming services. The company is also investing heavily in digital initiatives and streaming services, potentially opening up new revenue sources.
The Zacks Consensus Estimate for TEGNA’s 2024 earnings has remained consistent at $3.07 per share over the past month, with shareholders enjoying a 5% gain year to date.
Price and Consensus: TGNA
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