Hollywood Reporter: Why Comcast, Roku and Warner Music Exited Earnings Season With Improved Investor Sentiment

Story from Hollywood Reporter:

Media, entertainment and technology giants have wrapped up the latest quarterly earnings parade, which highlighted advertising challenges and continued cord-cutting. But some companies are exiting earnings season with improved sentiment among investors and Wall Street analysts.

“We think the stocks where sentiment improved most this quarter are Comcast, Charter Communications, and Roku,” Wells Fargo analyst Steven Cahall wrote in an Aug. 11 report. “Comcast/Charter are seeing more stable growth despite competition, while Roku is returning to stronger growth even with some strike/media and entertainment conservatism.”

The expert also noted other changes in investors’ feelings towards key stocks, but they aren’t quite something to call home about. “Disney sentiment has gone from terrible to just kinda bad, and it’s a similar swing for Warner Bros. Discovery [and] Paramount Global,” Cahall argued. “Spotify and Nexstar have seen perhaps the biggest sentiment changes to the downside, due to views on margin expansion and guidance, respectively.”

Cahall argues that the more bullish investor outlook on Comcast and Roku following their respective earnings updates and conference call commentary makes sense. “If there was a maxim this cycle, it was that stocks mostly follow earnings revisions,” the Wells Fargo analyst explained. “Downward revisions included mostly ad-centric stocks (e.g. ad agencies, radio, outdoor).”

Among other entertainment stocks gaining much praise this earnings season was Warner Music Group, which highlighted accelerating revenue momentum in key areas.

Below is a closer look at some of the key stocks earnings plaudits from analysts and investors this earnings season.

Comcast:

The cable titan and owner of Hollywood giant NBCUniversal and European pay TV powerhouse Sky scored with better-than-expected results across various units, but especially lower-than-projected subscriber losses and improved profitability in its core cable broadband business.

Goldman Sachs analyst Brett Feldman maintained his “buy” rating on Comcast shares after the media, entertainment and technology giant’s second-quarter earnings report and call, while raising his stock price target by $6 to $51. He cited “improved operating momentum and visibility across most of Comcast’s key businesses,” adding that his increase to future stock price multiples could prove “conservative as they are below Comcast’s historical averages.”

In a July 27 report, he did mention one concern. “Theatrical strength should persist into the third quarter on the success of Oppenheimer, but the ongoing writers’ and actors’ strikes cloud the outlook for content licensing over the near term,” the expert explained.

Otherwise, he feels more bullish though. “Comcast has effectively recalibrated its domestic broadband business to a lower subscriber growth environment such that it is able to consistently drive revenue through average revenue per user (ARPU) growth and margin expansion through cost containment,” he highlighted. “Peacock continues to gain traction with advertisers owing to a robust and diverse content lineup, which is partially offsetting intensifying pressures on its linear networks.” Plus, “theme parks momentum looks durable, with the third quarter likely to be another record quarter for earnings before interest, taxes, depreciation and amortization (EBITDA).”

Bank of America analyst Jessica Reif Ehrlich also boosted her Comcast stock price target by $6, in her case to $55, while sticking to her “buy” rating. In her July 28 report, entitled “Strong across the board,” summarizing: “We are raising our 2023 consolidated EBITDA, earnings per share and free cash flow, and we have also reduced our broadband sub net loss to 3,000” from 37,000.

Touting Comcast’s “strong” quarterly figures, she highlighted that a 19,000 broadband subscriber net loss “was better than projected, and nearly every segment across Connectivity and Platforms and Content and Experiences beat our forecasts.” Concluded Reif Ehrlich: “Comcast’s connectivity business is benefitting from low churn, strong ARPU increases (+4.5 percent) and healthy Business Services growth. These factors, in combination with expense reductions, are driving Connectivity and Platforms margin expansion.”

And Pivotal Research Group analyst Jeff Wlodarczak even upped his Comcast stock price target by $7 to $55, while reiterating his “buy” rating in a report whose title lauded an “Across the Board Beat” in the second quarter.

Explained the expert: “Comcast reported a solid second-quarter result that was better than we forecast on virtually every metric. Most importantly, highlighting the resiliency of their best-in-class data plant, they reported flattish net new data subscribers in the seasonally weak second quarter.” Wlodarczak also noted that NBCUniversal results were “nicely better than expected” as well “despite still heavy Peacock losses that should begin to decline in ’24.”

Charter Communications:

Fellow cable giant Charter also earned Wall Street praise with its latest quarterly results, losing fewer pay TV subscribers than rivals and returning to broadband customer growth.

“Getting back to growth” was the fitting title of Wells Fargo analyst Steven Cahall’s report, in which he boosted his Charter stock price target by $40 to $450, while sticking to his “equal weight” rating. He also increased his broadband user gain and adjusted EBITDA forecasts, while highlighting: “2026 remains the point of significant potential free cash flow inflection as network evolution capital expenditure comes down.”

But Cahall said that time will still have to tell if Charter’s expansion in rural areas can be a key growth driver. “Customer acquisition – both rural and non-rural – is exceeding our expectations,” he explained. “Conversion to EBITDA is the key test, and the efficacy of the rural strategy is still TBD.” After all, “net/net we think rural being a meaningful contributor to growth is the litmus test of success against the capital expenditures.”

TD Cowen analyst Gregory Williams maintained his “outperform” rating on Charter, but increased his stock price target by $11 to $582. “Charter posted mostly in-line second-quarter results with upside broadband and mobile adds,” he summarized. “Encouragingly, Charter reiterated its target of adding more broadband subscribers in 2023 than 2022, and the second-quarter beat puts it in the position to do so.”

The expert also pointed out renewed investor optimism. “Charter is showing broadband durability, and sentiment is rebounding as visibility is clearing up with ‘low but steady adds’ as the new normal,” he explained. Importantly, Williams also sees “upside” to free cash flow per share performance in future years, arguing that this “is not appreciated” by investors yet.

John Janedis, analyst at Wolfe Research, even upgraded Charter shares after the latest earnings report from “peer perform” to “outperform,” raising his stock price target to $565.

Roku:

Streaming device maker Roku, which has been expanding its offering of FAST channels, has been dividing Wall Street amid ad market challenges, a competitive streaming market and a lower-margin push into home TVs. But its latest results provided upside surprises and gave some analysts more confidence in its outlook.

Evercore ISI analyst Shweta Khajuria was encouraged by Roku’s second-quarter earnings report, which led him to maintain his “in line” rating, while boosting his stock price target by $5 to $75. “While we expected a revenue and EBITDA beat … the magnitude of the beat surprised us,” he explained. “While management’s tone remained cautious on second-half 2023 ad demand trends, we believe third-quarter revenue and EBITDA guides are conservative for the fifth consecutive quarter in a row, and we expect another beat.”

The analyst also explained why he lifted his price target, but isn’t more bullish on the stock yet, instead sticking to his more neutral view for now. “The key to Roku shares working will depend on the recovery of the scatter [ad] market, rising profitability, and sustainable [revenue] growth rates,” he wrote. “We are now at a one-year mark since our downgrade of Roku shares which was based on the thesis that the business wasn’t broken but the macro headwinds were just too severe for the company, with no near-to-mid-term catalyst and ongoing elevated levels of operating expense spend.” Khajuria’s takeaway: “The latter is being addressed, while the former remains a headwind.”

Tim Nollen, analyst at Macquarie, reiterated his “outperform” rating on Roku shares with a $93 stock price target in a July 28 report entitled “Platform ads bounce back.”

While he highlighted mostly better-than-expected results, including encouraging advertising trends, he also noted on the ad front: “Tech/telco and media & entertainment (M&E) spending were weak, and management warned on further M&E downside ahead due to the writers/actors’ strikes; this hits Roku in particular given the heavy promotions it provides for content.”

But the Macquarie expert also lauded Roku for looking to expand its clientele of marketers. “Efforts underway to diversify the ad base include opening up the Roku City home page to advertising, using more third party digital service providers to bring in more ad demand, and the recently-announced Shopify partnership that can spur demand from smaller advertisers.”

Concluded Nollen: “All in, third-quarter guidance of revenue growth of 7 percent and adjusted EBITDA of negative $50 million is a little muted after this strong second quarter. But operating expenses growth should continue to moderate in the second half, and Roku remains committed to its target of returning to profitability during 2024.” Added the analyst: “While advertising is cyclical, Roku continues to amass a scaled platform that is increasingly open to abundant connected TV demand sources to offer full-scale top and bottom funnel advertising.”

Warner Music Group:

The music major’s latest quarterly earnings report proved to be a hit with Wall Street, with CEO Robert Kyncl on the earnings call also touting the success of the Barbie movie soundtrack, the company’s recent deal with TikTok and Warner Music’s approach to AI.

Morgan Stanley analyst Benjamin Swinburne stuck to his “overweight” rating on Warner Music Group (WMG), increased his financial estimates and boosted his stock price target by $4 to $38 in a report entitled “Double Platinum.”

“The results and outlook demonstrated two important trends for the WMG bull case,” he highlighted. “First, new and catalog music performance improved, driving faster rev growth. Second, key growth drivers at the industry level are coming through, from digital service provider price increases to new agreements with emerging platforms.”

Swinburne acknowledged some challenges in the recent past, writing: “While the past year has been disappointing, we are now seeing better performance from WMG’s artist roster, and industry tailwinds reemerge, supporting our bullish view.”

Streaming is part of that. “We continue to see music streaming as offering a long growth runway, which underpins our overweight ratings on both WMG and SPOT,” the Morgan Stanley expert noted. “We also continue to believe music labels, such as WMG, benefit from growing global consumption trends and growing monetization opportunities in a business model that generates healthy free cash flow and return on invested capital levels.”

Goldman Sachs analyst Stephen Laszczyk in an Aug. 9 report also lauded the WMG earnings update for hitting the right chord. He maintaned his “buy” rating and raised his stock price target by $5 to $40, citing “better than expected fiscal third-quarter 2023 results and forward commentary that support our outlook for accelerating revenue growth, continued margin expansion, and robust free cash flow generation.”

Predicting “accelerating” streaming revenue growth, he shared with investors: “We expect recorded music streaming revenue growth will accelerate from around 6.0 percent in fiscal year 2023 to around 12 percent in fiscal year 2024 driven by market share gains at WMG, recent digital service provider pricing increases, a new deal with improved economics at TikTok, and improving trends in ad-supported streaming.”

Guggenheim analyst Michael Morris similarly shared this takeaways from the music company’s earnings update, summarizing in the headline of his report: “Third-Quarter Subscription Revenue Returns to Double Digits; Momentum Likely to Continue in Fiscal Fourth Quarter.” Given that “momentum appears to be building,” he maintained his “buy” rating on the stock and raised his stock price target by $4 to $36.

Macquarie analyst Tim Nollen even pushed his price target $7 higher to $35, but remained “neutral” on WMG, choosing a title with a music reference for his note to investors: “Plays an ascending interval.”

Raising his earnings estimates after what he called an “impressive quarter,” he argued that “CEO Robert Kyncl is having early success” in deals with newer streaming platforms “to monetize the company’s IP more effectively.” Nollen again chose the word “impressive” to describe the CEO’s “strides monetizing emerging streaming platforms just seven months into his tenure.”

© 2023 The Hollywood Reporter.