Discontinued Streaming Venture With Disney Will Impact Future Profitability

Key Takeaways

• Discontinuation of the Venu joint venture and competitive pressures in sports rights could impact Fox’s future affiliate revenue growth.
  
• Investment in Tubi and D2C services aims at long-term growth but could affect short-term profitability and earnings stability.
  
• Fox's strategic revenue growth, affiliate renewals, and new offerings position it well for sustained profitability and market expansion, notably in advertising and direct-to-consumer segments.

Catalysts

Operates as a news, sports, and entertainment company in the United States (U.S.).

• The discontinuation of the sports streaming joint venture, Venu, with Warner Bros. Discovery and Disney might lead to missed opportunities in digital content distribution, potentially impacting future affiliate revenue growth.
  
• Fox’s plan to launch a direct-to-consumer (D2C) service targeting cord-cutters and cord-nevers involves relatively low incremental costs; however, the service has modest subscriber expectations and pricing strategies that may not significantly impact revenue or net margins immediately.
  
• Continued investment into Tubi could delay profitability in the short term, which might affect earnings growth despite Tubi's strong advertising revenue performance.
  
• Potential challenges in sustaining political advertising revenue growth post-elections could lead to variability in total company advertising revenue, affecting future earnings stability.
  
• Fox faces competitive pressure in obtaining future sports rights from digital streaming competitors like Netflix, which could limit audience reach and impact affiliate fee revenues.

Fox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fox's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.4% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $4.36) by about March 2028, down from $2.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Media industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 2.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Fox Future Earnings Per Share Growth

Risks

• Fox's strong revenue growth, driven by a 20% increase year-over-year, showcases its ability to outperform expectations, highlighting a potentially robust future revenue stream.
  
• Tubi's impressive 31% increase in advertising revenues and strategic focus on younger, diverse audiences could lead to continued revenue growth and future profitability for Fox.
  
• The completion of all affiliate renewals impacting fiscal 2025 and the introduction of skinny bundles signal favorable pricing and distribution arrangements, which may positively impact Fox's net margins.
  
• Fox's solid political advertising revenue and high demand for sports programming contribute to its record advertising growth, which may sustain or further boost earnings.
  
• The development of a new Direct-to-Consumer offering targeted at cord-cutters and cord-nevers without significant incremental rights costs suggests Fox can expand its audience and revenue streams without substantially impacting its current revenue flow and profit margins.

Valuation

• The analysts have a consensus price target of $56.662 for Fox based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $66.0, and the most bearish reporting a price target of just $45.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.9 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $55.67, the analyst price target of $56.66 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.