Live News And Sports Strength Will Drive Outsized Long Term Upside

Catalysts

About Fox

Fox Corporation is a media company focused on live news, live sports, and ad-supported digital video through platforms such as FOX One and Tubi.

What are the underlying business or industry changes driving this perspective?

• Rising demand from advertisers for brand safe, broad reach live news and sports environments is driving strong pricing power at FOX News and FOX Sports, which is expected to support sustained advertising revenue growth and expanding EBITDA.
• Structural shifts in viewing toward free, ad-supported streaming are accelerating Tubi's scale and profitability. This is positioning it to deliver double digit revenue growth with margins trending toward the low to mid 20 percent range and a growing contribution to earnings.
• Improving pay TV dynamics, including slower subscriber erosion and growth in skinny bundles built around news and sports, are enabling consistent distribution fee price increases that underpin stable to rising distribution revenues and predictable cash flows.
• FOX One's early traction with bundled distribution partners such as Amazon, ESPN and Verizon broadens reach to cord cutters and cord nevers. This creates incremental high margin subscription and advertising revenue streams over time.
• Record engagement and audience share across core brands, including NFL on FOX, college football and FOX News, enhance Fox's negotiating leverage with distributors and advertisers. This supports higher affiliate fees, stronger CPMs and long term net margin expansion.

Assumptions

This narrative explores a more optimistic perspective on Fox compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Fox's revenue will grow by 2.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 12.4% today to 11.5% in 3 years time.
• The bullish analysts expect earnings to remain at the same level they are now, that being $2.0 billion (with an earnings per share of $5.17). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 15.7x today. This future PE is greater than the current PE for the US Media industry at 16.2x.
• The bullish analysts expect the number of shares outstanding to decline by 2.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The core linear pay TV ecosystem continues to shrink over time, and although subscriber erosion has recently moderated to under 7 percent, a re acceleration in cord cutting or weaker than expected growth in skinny bundles could eventually overwhelm pricing gains on affiliate renewals. This could put sustained pressure on distribution revenue growth and limit EBITDA expansion.
• The current exceptionally strong advertising conditions across news, sports and Tubi may prove cyclical. A downturn in key verticals such as pharma, financial services and tech alongside a normalization in political ad spending could reverse recent 6 percent advertising revenue growth and compress net margins as fixed programming and rights costs remain elevated.
• Tubi’s early move into profitability and the expectation of long term margins in the 20 to 25 percent range rely on continued 27 percent revenue growth and rising total view time. However, intensifying competition in ad supported streaming and higher content costs could stall its momentum, resulting in weaker digital segment earnings contribution and lower consolidated EBITDA than implied in the bullish view.
• FOX One’s launch success is still in its infancy and management only targets low to mid single digit millions of subscribers over time. If subscriber uptake slows as sports seasons roll over or key distribution partners change strategy, the service may remain too small to offset secular linear declines, limiting upside to both subscription revenue and long term earnings growth.
• Escalating content and sports rights inflation, particularly for premium properties like the NFL, college football and Major League Baseball, could outpace the company’s ability to raise affiliate fees and ad pricing over the long run. This could drive total expenses up faster than the current 6 percent rate and result in structurally lower net income and earnings per share despite near term audience strength.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Fox is $90.37, which represents up to two standard deviations above the consensus price target of $71.53. This valuation is based on what can be assumed as the expectations of Fox's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $97.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $17.6 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $71.82, the analyst price target of $90.37 is 20.5% higher.
  
• 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.