Rising Costs And OTT Rivals Will Squeeze Margins

Key Takeaways

• Increased competition, audience fragmentation, and regulatory changes threaten Studio Dragon's market position and revenue diversification efforts.
  
• Rising production costs and dependence on major streaming partners are reducing profitability and exposing the company to contract risks.
  
• Strategic international expansion, cost reductions, and investment in original content and partnerships are positioning Studio Dragon for sustained global growth and profitability.

Catalysts

A drama studio, produces and provides drama contents worldwide.

• Global content saturation and growing consumer fatigue are increasingly fragmenting audience attention, which may substantially reduce the revenue per drama title and the effectiveness of Studio Dragon's international expansion, directly limiting top-line growth.
  
• Mounting competition from in-house production studios of global OTT giants such as Netflix and Disney is expected to push independent players like Studio Dragon to the periphery in both domestic and export markets, resulting in significant loss of market share and sustained revenue pressure.
  
• Persistent reliance on a limited number of major streaming partners exposes Studio Dragon to heightened renegotiation risk, likely leading to price squeezes and contract reductions that will cut into licensing revenues and compress overall operating margins long-term.
  
• Rising production costs continue to outpace any attempted cost control measures, as talent inflation and higher standards for global-quality content weigh heavily on the company's cost structure, ultimately eroding net margins and worsening earnings volatility.
  
• Regulatory headwinds, including strengthening data privacy laws and increased protectionism in key overseas markets, could sharply restrict Studio Dragon's ability to monetize content internationally, stunting both revenue diversification and long-term earnings growth.

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 13.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.2% today to 7.2% in 3 years time.
• The bearish analysts expect earnings to reach ₩52.2 billion (and earnings per share of ₩1822.15) by about July 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 26.0x on those 2028 earnings, down from 92.0x today. This future PE is greater than the current PE for the KR Entertainment industry at 19.0x.
• 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 9.15%, as per the Simply Wall St company report.

Studio Dragon Future Earnings Per Share Growth

Risks

• Studio Dragon is strategically expanding its international content distribution and partnerships, including new releases in Latin America, India, and the Middle East, which could drive significant long-term revenue growth and geographic diversification.
  
• The company has implemented a plan to achieve up to a 10 percent reduction in production costs through actual cost settlement and improved outsourcing management, which could meaningfully increase operating margins and net earnings over time.
  
• Continued investment in M&A and partnerships, such as the acquisition of domestic studios and increased stake in Skydance, is strengthening Studio Dragon's IP portfolio and positioning it as a leading global content producer, with positive implications for recurring revenue streams.
  
• The global demand for premium K-content remains strong, with international platforms like Amazon Prime actively partnering for distribution, supporting elevated export pricing and stable overseas sales that could boost revenue and profitability.
  
• Studio Dragon is focusing on producing more original content and growing its lineup with new hit IP and expanded co-productions, which, if successful, may build sustainable growth momentum and drive higher revenue and net income in the long run.

Valuation

• The assumed bearish price target for Studio Dragon is ₩34775.18, which represents two standard deviations below the consensus price target of ₩55200.0. 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 ₩721.2 billion, earnings will come to ₩52.2 billion, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of ₩47950.0, the bearish analyst price target of ₩34775.18 is 37.9% 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.