Wall Street hasn’t been kind to Hollywood entertainment giants this year — but that may be about to change.
Disney, once thought of as a stock-market pace car setting the tempo for the rest of the industry, has been one of the Dow Jones industrial average’s biggest dogs in 2022, with share prices dropping 28% since the start of the year. (The stock closed at $112.32 on Thursday.)
The overall market has taken a beating this year: The S&P 500 has slumped 20%, the tech-laden Nasdaq is down 27%, and the Dow has tanked 14%. But Hollywood conglomerates have fared even worse: Paramount Global shares have dropped 29%, Lionsgate fell 45%, while Warner Bros. Discovery and Netflix shares have been stunningly sliced by more than half. Fox, which has declined a relatively modest 12%, has ironically been the one Hollywood stock to break out from the pack simply because the Murdoch-led media empire has focused on terrestrial and cable operations instead of going all in on streaming.
Still, trading patterns are flashing signals that a comeback may be ahead. There’s been heavier-than-usual volume on the number of shares traded since Sept. 1 in those six biggest entertainment companies. And that’s a sign that investors are wading back into the entertainment sector with a bit more financial swagger.
“The old Wall Street admonition to ‘buy straw hats in winter and overcoats in summer’ still holds, but less so for movies and entertainment companies, since their product/service offering is more diversified these days,” Sam Stovall, chief investment strategist at CFRA Research, told TheWrap. “Amusement parks offer entertainment opportunities in the summer when people would rather be outside, while movies/streaming give reason for people to stay comfortably ensconced at home in the dead of winter.”
What’s more, the closing months of the year have traditionally been among the entertainment industry’s most buoyant. The last hot dog eaten on Labor Day tends to tee up a pretty strong period for entertainment companies that continues through year’s end. Since 1990, the Standard & Poor’s 500 Movies and Entertainment industry index rose an average 6.24% in price between Aug. 31 and Dec. 31. That handily beats the benchmark S&P 500’s 4.4% average gain — and the industry has pulled off this feat 60% of the time.
That doesn’t mean investors are ready to put a second mortgage on the house and sink every last penny into Netflix or WBD. Remember, the market has given way in the past to what former Federal Reserve Chairman Alan Greenspan once famously coined “irrational exuberance.” Like the Grateful Dead song, “Driving that train high on cocaine” often leads to “trouble ahead, trouble behind.”
Michael Burry, the fund manager who was played by Christian Bale in “The Big Short” movie, on Wednesday tweeted, “We have not hit bottom yet.” Burry, who famously predicted the 2008 financial firestorm, thinks there will be a cataclysmic collapse of U.S. stocks as the nation barrels toward recession.
“Crypto crash. Check,” he tweeted. “Meme crash. Check. SPAC crash. Check. Inflation. Check. 2000. Check. 2008. Check. 2022. Check.”
One veteran Wall Street analyst said entertainment stocks have fallen so low that they’re now underpriced, a relative bargain and reminded him of the buying opportunities that emerged during the dark days of the financial crisis, which sideswiped banking and brokerage stocks.
“This is like buying Bank of America shares when it was worth $4 during the financial crisis,” the analyst said, noting the bank’s stock has risen 750% since then. “Not that you can compare the current market to 2009, but entertainment companies are dirt cheap and there’s no way to go but up.”
This is precisely why market maestro Dan Loeb plunked down roughly $1 billion last month into Disney’s stock, disclosed in a regulatory filling. The activist investor’s Third Point asset management firm held a Disney stake for two years from 2020 to early 2022, forcing Disney to double down on its streaming services. The stock rose 70% during that time period.
Now Loeb is back, seeking to unpack more value in the company that could double the share price in short order. He’s urged Disney to spin off ESPN (an idea the company has dismissed), buy up the 33% stake of Hulu now owned by cable giant Comcast and make changes in Disney’s 11-member board of directors (which CEO Bob Chapek might endorse after the board seriously lagged on renewing his contract).
Loeb’s investment in Disney appears to have energized investors, especially given the fact that the stock’s price-to-earnings ratio has decreased 78% since last September. This suggests the current price may be a bargain.
And Chapek has told investors that he expects the company’s fourth quarter will continue to outperform analyst expectations, especially as revenue from Disney’s theme park business builds off the third quarter’s 70% revenue jump to $2.2 billion. The idea is that there is pent-up demand now that the U.S. is recovering from the pandemic and to build momentum for the company’s streaming initiatives (including this week’s Disney+ Day and the 2022 D23 Expo at the Anaheim Convention Center).
This could help Disney regain its pole position as Hollywood’s unofficial stock-market pace car, giving the entertainment industry a financial barometer and a reinvigorated sense of direction. The company’s stock price has ticked up nearly 19% since June 30.
Other Hollywood companies are showing signs of resurgence as well. On Wednesday, Wells Fargo equity analysts advised scooping up shares of Warner Bros. Discovery — just “close your eyes and buy it.” Since completing its merger in April, the world’s No. 2 entertainment company’s shares are down 51%, closing Thursday at $12.54 — an amount the bank’s analysts think should be trading at $19 in a year. That’s a 52% jump in value from the current price.
Netflix this week got an upgrade from Macquarie analyst Tim Nollen, who expressed enthusiasm for the streamer’s upcoming ad-supported tier by raising the bank’s price target from $170 per share to $230, a bump from the current valuation of $221. Still, that’s tragically below the near $600 the stock was trading at a year ago.
Paramount’s stock remains a “hidden gem,” equity analyst Denis Buivolov wrote in a column on the financial website Seeking Alpha. He said the company’s better-than-expected third quarter results, fueled by the success of the big-screen blockbuster “Top Gun: Maverick,” will power its streaming service in the months ahead. The stock is down nearly 30% this year, closing Thursday at $22.71.
The only major entertainment stock that isn’t showing much bounce is Lionsgate, which got a downgrade from Wolfe analyst Peter Supino on Wednesday that sent the already depressed stock price even lower. Investors seem confused by CEO Jon Feltheimer’s strategy for the mini-major, which is either a takeover target or about to roll out some major acquisitions of its own.