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Netflix, Disney had a rough year and 2023 is not looking good

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In this photo illustration, a hand holds a TV remote in front of the Disney Plus logo on a TV screen.

Rafael Henrique | Soup Pictures | light rocket | Getty Images

Media stocks have taken a hit this year, with companies losing billions of dollars in market value as streaming subscriber growth has slowed and the advertising market has taken a turn for the worse.

The pain will likely continue into the first half of 2023, according to media executives and industry analysts.

disney and Warner Bros. Discovery, two companies going through transitions, especially when it comes to streaming, have each hit 52-week lows in recent days. So far this year, Warner shares are down more than 60% and Disney shares are down more than 45%.

The media industry has reached a tipping point as competition among streaming services is at an all-time high and consumers are becoming more picky about subscriptions. In addition, companies are struggling with lower advertising revenue and more cable cuts. Some expect consolidation to occur in the near future.

“Industry-wide, it’s chaos,” said Mark Boidman, director of media and entertainment investment banking at Solomon Partners. “Everyone has been saying for years that technology is going to change the media world, and it has. But we’re at this real point now where it’s crunch time.” He predicts that packet streaming will become more important in 2023.

It was a difficult year for the market in general. The Nasdaq Composite is heading for its worst drop since 2008 and is poised to underperform the S&P 500 for the second consecutive year. Stocks in other industries, including technology, were beaten.

Major tech stocks have lost at least half of their value. streaming giant from netflix the stock dropped more than 50%, with its market value halved to about $123 billion.

Netflix’s first-quarter subscriber loss – its first in more than 10 years – has weighed on the media industry this year.

streaming problems

When Netflix reported that it lost subscribers in the first quarter – the first time in over 10 years – the news sent a shock wave through the industry. The streaming giant blamed increased competition. It also began exploring a cheaper, ad-supported option for customers, something the company had long said it would not do.

Since then, other media company stocks have followed suit.

Disney, meanwhile, has faced challenges since the early days of the pandemic, when movie theaters and theme parks were closed for months. Disney’s financial performance has come under scrutiny in recent months, and after its disappointing earnings report in November, the company’s board fired Bob Chapek and brought back longtime boss Bob Iger.

While Disney investors were immediately excited by Iger’s return, shares soon after faltered, most recently due in part to the underwhelming box office opening for “Avatar: The Way of Water.”

Warner shares have declined this year as management at the newly combined company – the merger of Warner Bros. and Discovery closed this spring — cut costs, warned of the tough ad market and focused on making its streaming business profitable going forward.

Since Netflix’s losses earlier this year, Wall Street has questioned the viability of streaming business models.

“I think everyone was trying to emulate Netflix in hopes of seeing a similar valuation, and at this point the parade is over,” said John Hodulik, an analyst at UBS. “Netflix is ​​no longer being valued on a revenue multiple. Investors are wondering how the direct-to-consumer product arrives at profitability.”

The sentiment also weighed on Warner, which plans to combine HBO Max and Discovery next year, as well as paramount global and from Comcast NBCUniversal. Investors have a magnifying glass on subscriber counts and content spending, which have run into the tens of billions of dollars for these companies.

“Now there’s a new focus on those costs,” Hodulik said. “I think Warner Bros. Discovery is leading the charge, but we’ll see other companies scale back their ambitions in the streaming space over time.”

Squeezing the ad market

In addition, the advertising market has deteriorated. In times of economic uncertainty, companies often reduce advertising spend, which is often seen as discretionary.

Paramount missed third-quarter estimates after its advertising revenue fell, with its stock hitting bottoms in the following days. The stock has dropped more than 45% this year. Paramount shares rose recently after Warren Buffett’s Berkshire Hathaway increased its stake in the company, fueling speculation it could be a takeover target.

Earlier this month, at an industry conference, CEO Bob Bakish lowered expectations for the company’s fourth-quarter ad sales. NBCUniversal CEO Jeff Shell also said at the same conference that advertising has steadily deteriorated over the past six to nine months, although he noted that advertising revenue will increase in the fourth quarter.

“These stocks are down a lot and investors are wondering why I would buy this before the bad news not just in the next quarter but in the quarters to come,” Hodulik said. “Things can get worse before they get better.”

However, there were some bright spots on the advertising front.

Streamers like Netflix and Disney are now offering cheaper, ad-supported options for their customers, which should bode well for their business. “We also anticipate that streaming advertising will become more important in the coming year,” said Boidman of Solomon Partners.

Political advertising revenue also increased in the third and fourth quarters due to the heated midterm elections, with broadcaster owners such as Nexstar Broadcast Group and Tegna reaping the benefits. These stocks, particularly Nexstar, were up for the year despite general weakness in their industry, as their revenues depend heavily on the high fees that distributors pay to broadcast their local networks.

subscription TV exodus

Cord-cutting, while not a new trend for the industry, “accelerated to an all-time low” in the third quarter, according to MoffettNathanson data. Along with the publicity, Paramount cited it as a drag on its most recent quarterly results.

For media companies like Comcast and Letter of Communicationssluggish subscriber growth on the broadband front, rather than the pay-TV business, weighed more significantly on its shares.

Charter, which only offers pay TV, broadband and mobile services and doesn’t have a foot in the streaming wars like Comcast, has seen its stock take a hit recently. Charter’s shares are down nearly 50% year-to-date and took a hit earlier this month when the company told investors it would increase spending on its broadband network in coming years. Comcast shares are down more than 30% so far this year.

“We knew that cord cutting was happening, but it has definitely accelerated since the start of the pandemic,” Hodulik said. “It looks like it’s going to get worse as we go into the first quarter.”

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.