22 May 2023
Sentiment has been fairly stable across the full-year reporting season, with a decent Q422 performance despite tougher comparatives, providing full-year numbers with relatively few surprises.
Outlook narratives have remained circumspect, though, with macroeconomic uncertainties tempering the more buoyant expectations. On our valuation screens, many media stocks continue to trade at substantial discounts to their long-term averages, suggesting that prices may have further to recover or that there are downgrades yet to come (or both). The widest discounts are in European cable and satellite, US interactive media and services and European interactive home entertainment.
This second edition of MediaWatch (the inaugural version was published in January 2023) looks at performance and changes to consensus forecasts for companies in the media sector across the UK, European and US markets.
We highlight the direction of travel of revenue and EBITDA (as a proxy for earnings) estimate changes across the seven constituent subsectors, as defined by the MSCI’s Global Industry Classification Standard (GICS), for CY23 and CY24. We then look at the individual stock level to see where current valuations are compared to their long-term averages, using values back to 2006 to smooth out the cycle.
On the basis of our screens, a large majority of stocks are trading at substantial discounts to their long-term average ratios, which indicates that pricing remains too low or that market earnings estimates are too high, or both.
Q123: Cautious and steady
Household discretionary spending remains constrained by higher housing and utility costs, emphasising the need for media companies to deliver value, which is key to staying part of households’ budgets. Advertising spend expectations are also reflecting this, with brands keen to stay relevant and present.
We are seeing this in the media sector numbers, with limited top-line growth expected but slightly better margins, as management teams focus on cost containment in the face of continuing input inflation. Off-shoring and near-shoring trends look set to continue.
The general tenor of management FY23 outlook statements so far has been that year-to-date operating performance has been in line with internal and market expectations (which aligns with our broad observations on consensus estimate revisions), with the rider that visibility is not necessarily good. There should be a clearer view when Q123 statements are published later in April and in May.
There are some particular themes exercising media sector observers at the moment, which represent both opportunities and threats to participants. These include:
- Artificial intelligence (AI). The adoption of AI is already significant but in limited applications. There is considerable excitement about the potential for AI and machine learning to help automate processes and identify inefficiencies, allowing greater resource to be focused on creativity. There is acknowledgment that ‘giving AI the keys’ could be a major risk for brand equity and the creative industries, and that there are needs for clearly defined limits. These boundaries will be increasingly tested, with the current debate over AI-generated music learning from copyright material and the place of such content on streaming platforms just one example.
- Retail media. Retail media has been a major revenue generator for Amazon for some time but is now gaining ground across the piste, facilitated by the shifting privacy environment. This is highlighting the value of the first-party data owned by retailers, which enables them to segment and access audiences for others – effectively realising the value of the ‘real estate’ on their consumer websites. Some commentators are suggesting that the value of this marketing channel will exceed the spend on TV by FY25.
…and cooling topics
Other topics are cooling because people have probably grown tired of talking about them, rather than them losing relevance.
- Digital transformation remains a major impetus, but the hype around it has mutated and the associated valuation premium has, to some extent, dissipated. The business need for external input around the repositioning of operational activities to cater for changed patterns of interaction remains pivotal. Improving understanding of the value of having an attractive and intuitive user experience should keep demand for advice and implementation assistance robust. After all, the risk of annoying or alienating potential customers is simply not worth taking when their alternatives are seconds and clicks away. Transformation projects of scale can be a mixed blessing, with the inherent risks in managing the cost base and deliverables. There are still attractive opportunities, though, in associated recurring revenues driving continuous improvement, as customers have come to expect.
- Inflation has clearly not gone away but, as the year progresses, the comparators will inevitably start to ease. The underlying skills shortages, particularly in data science and engineering, are still there, but the particular squeezes in developed markets have been somewhat eased by some of the tech majors having reversed their earlier hiring sprees, with the net result of less overheated specialist labour markets.
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