Streaming Success And Strategic Investments Secure Bright Future For Media Giant

Key Takeaways

• Fox Corporation shows potential for increased income through stable affiliate revenue growth, Tubi's success, and strong performances in Fox News and Fox Sports.
  
• Strategic investments in digital growth and a solid balance sheet hint at future revenue growth and margin expansion opportunities.
  
• Labor disputes, advertising and subscriber declines, and digital market challenges highlight volatility and potential threats to Fox's revenue and margin stability.

Catalysts

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

• The consistent growth of Fox Corporation's affiliate revenue, driven by ongoing renewals, suggests a stable and potentially expanding stream of income, which can positively impact net revenue and net margins.
  
• Tubi's impressive viewership metrics and revenue growth highlight a successful expansion into the streaming space, likely contributing to top-line growth and diversification of revenue sources.
  
• The robust performance of Fox News and its growth in viewership, particularly in key demographics, points to a strong brand loyalty and the potential for increased advertising revenue.
  
• The momentum in Fox Sports, including record viewership for soccer events and a strong NFL schedule, indicates potential for significant advertising revenue growth.
  
• A solid balance sheet and strategic investment in digital growth initiatives, such as the upcoming launch of Venue Sports streaming service, suggest forward-looking avenues for revenue growth and margin expansion.

Assumptions

• Analysts are assuming Fox's revenue will grow by 2.2% annually over the next 3 years.
• Analysts are assuming Fox's profit margins will remain the same at 10.7% over the next 3 years.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $3.78) by about September 2027, up from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2027 earnings, down from 12.4x today. This future PE is lower than the current PE for the US Media industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 5.93% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Risks

• The ongoing SAG and WGA labor disputes impacting content revenues could potentially reduce the availability and quality of new entertainment productions, affecting advertising and subscription revenues.
  
• An 18% decline in total company advertising revenues, driven by comparison to previous cyclical events, indicates potential volatility and reliance on marquee events for advertising income, risking future ad revenue stability.
  
• The mid-8% industry subscriber decline impacts affiliate fee revenues, posing a risk to sustainable revenue growth in traditional cable and satellite distribution channels.
  
• The investment in Tubi and digital growth initiatives, while showing revenue growth, suggests substantial ongoing capital expenditure that could impact net margins if not managed against revenue growth expectations.
  
• The challenges in the digital advertising market, despite a 7% revenue growth in the quarter for Tubi, indicate a competitive and rapidly changing environment that could risk future digital advertising revenue growth and margins.

Valuation

• The analysts have a consensus price target of $41.23 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 $62.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.9 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of $40.31, the analyst's price target of $41.23 is 2.2% 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.