Global Streaming Saturation And Rising Costs Will Undermine Profitability

Key Takeaways

• Heavy reliance on a few global streaming partners and shrinking licensing opportunities place earnings and revenue growth under significant long-term risk.
  
• Rising production costs, competitive threats, and uncertain content pipeline are eroding profit margins and undermining future market positioning.
  
• Expanding international partnerships, diversified content and business models, and potential access to China position Studio Dragon for sustained topline growth and improved profitability.

Catalysts

A drama studio, produces and provides drama contents worldwide.

• The global streaming market has become increasingly saturated, with subscriber growth slowing and many platforms rationalizing their content spend. This reduced ability to license shows abroad is likely to weigh heavily on Studio Dragon's future revenue growth, as reflected in the recent drop in both episode output and licensing sales.
  
• As consumer fatigue with fragmented streaming services mounts, the demand for premium serialized content may face long-term erosion, which would undermine Studio Dragon's historical pricing power and depress both top-line revenue and operating margins.
  
• Production costs continue to surge-especially for marquee talent and higher-quality shows-while Studio Dragon's current lineup and backlog remain uncertain and at historic lows. Unless there is a material uptick in licensing fees or coproduction support, net margins will remain under prolonged pressure or deteriorate further.
  
• Studio Dragon's extreme dependence on a handful of global streaming partners such as Netflix exposes it to major revenue concentration risks. Any termination or renegotiation of these agreements, or a shift in content strategy by these partners, could cause a steep decline in earnings visibility.
  
• Competition from global and regional content producers is intensifying, while new technologies such as AI-driven content creation threaten to commoditize the traditional production process. These trends will likely squeeze Studio Dragon's ability to grow export revenues and threaten its long-term competitive positioning.

Studio Dragon Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Studio Dragon compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Studio Dragon's revenue will grow by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.2% today to 9.1% in 3 years time.
• The bearish analysts expect earnings to reach ₩52.9 billion (and earnings per share of ₩1854.48) by about August 2028, up from ₩15.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.2x on those 2028 earnings, down from 94.1x today. This future PE is greater than the current PE for the KR Entertainment industry at 19.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.17%, as per the Simply Wall St company report.

Studio Dragon Future Earnings Per Share Growth

Risks

• The global success of content such as the Japanese version of Marry My Husband and Unwritten Seoul on platforms like Amazon Prime Video Japan and TVN demonstrates Studio Dragon's strong international competitiveness and positions the company to benefit from long-term growth in global streaming, which could drive export revenues higher in the coming years.
  
• Studio Dragon is planning to expand its lineup significantly in the second half of the year with fourteen new titles and is pursuing more than twenty projects for the US market, illustrating an increase in production scalability that, if successful, could lead to higher sales volumes and sustained topline revenue growth.
  
• A potential easing of restrictions on Korean content in China, combined with ongoing discussions about co-productions and co-airing with Chinese platforms, could unlock new and lucrative revenue streams from the large Chinese media market, enhancing long-term profitability.
  
• Studio Dragon is moving beyond traditional drama production by diversifying its business model to include actor partnerships and ancillary businesses, which could contribute to more stable recurring revenues and expand profit margins through better monetization of its intellectual property.
  
• Strategic partnerships with major global OTT platforms such as Netflix, Amazon, and Apple TV+ continue to expand, providing Studio Dragon with upfront production fees, broad international exposure, and opportunities for recurring earnings, which may help reduce revenue volatility and improve future operating margins.

Valuation

• The assumed bearish price target for Studio Dragon is ₩35428.72, which represents two standard deviations below the consensus price target of ₩55533.33. This valuation is based on what can be assumed as the expectations of Studio Dragon's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩71000.0, and the most bearish reporting a price target of just ₩30000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩578.1 billion, earnings will come to ₩52.9 billion, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of ₩49000.0, the bearish analyst price target of ₩35428.72 is 38.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.