Digital Disruption And Regulatory Risks Will Erode Valuation

Key Takeaways

• Free digital content, social media, and AI-driven news feeds are reducing subscription appeal, fragmenting audiences, and undermining prospects for revenue and subscription growth.
  
• Heightened regulatory, compliance, and competition pressures are squeezing margins, increasing costs, and threatening the sustainability of both earnings and advertising revenues.
  
• Digital transformation, strategic partnerships, disciplined cost management, and balance sheet strength position News Corp for sustained growth, improved profitability, and greater shareholder returns.

Catalysts

A media and information services company, creates and distributes authoritative and engaging content, and other products and services for consumers and businesses worldwide.

• The ongoing proliferation of free digital content and powerful aggregators continues to undermine consumer willingness to pay for subscriptions, putting long-term pressure on pricing power and creating a ceiling for revenue expansion, especially as digital ARPU gains are increasingly offset by potential churn and market saturation.
  
• The acceleration in the use of AI-driven personalized news feeds and the dominance of social media platforms intensifies the fight for user attention, fragmenting audiences and reducing sustained engagement across News Corp's properties, with adverse implications for digital subscription growth and total revenue.
  
• Regulatory risk is rising as governments worldwide increase scrutiny of data privacy, intellectual property, and misinformation, which will likely force News Corp to increase compliance and legal expenditures, further eating into net margins and hindering profitability even as digital becomes a bigger revenue driver.
  
• Structural shifts away from traditional print toward digital media have already reduced print advertising and circulation revenues, but ongoing weakness and impairment in legacy print and publishing assets will drive further non-cash write-downs and restructuring costs, continuing to depress reported earnings and constrain EPS growth.
  
• Increasing competition from technology giants for both advertising spend and original content distribution is squeezing industry-wide margins, making it difficult for News Corp to maintain its current cross-platform advertising rates and threatening the long-term sustainability of both revenue and EBITDA growth.

News Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on News compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming News's revenue will decrease by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.5% today to 7.1% in 3 years time.
• The bearish analysts expect earnings to reach $634.2 million (and earnings per share of $1.11) by about July 2028, up from $467.0 million 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 28.3x on those 2028 earnings, down from 36.2x today. This future PE is greater than the current PE for the US Media industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

News Future Earnings Per Share Growth

Risks

• The ongoing transformation toward digital platforms, including Dow Jones, Digital Real Estate, and Book Publishing, has shifted the revenue base to high-growth, recurring streams such as digital subscriptions and B2B information services, which is likely to stabilize and increase overall revenue and EBITDA margins in the long term.
  
• Strategic acquisitions and partnerships, such as those with OpenAI, DAZN, and the addition of Dragonfly and Oxford Analytica, are expanding News Corp's technological and content capabilities, which strengthens its intellectual property, enhances product offerings, and supports revenue growth across key verticals.
  
• The company's rigorous cost discipline, structural simplification through divestitures like Foxtel, and buyback initiatives have resulted in improved net margins and elevated operating leverage, which increases earnings per share and free cash flow available for shareholder returns.
  
• Sustained growth in premium digital subscriptions and robust digital ARPU across mastheads, as well as resilience in professional information revenues, demonstrate strong consumer willingness to pay for trusted content-mitigating risks of declining print advertising and providing improved revenue visibility.
  
• News Corp's upgraded investment grade credit rating, strong balance sheet, and increasing optionality allow for further internal investment and M&A in high-margin businesses, supporting its ability to maintain or grow profitability and deliver enhanced shareholder value through capital allocation flexibility.

Valuation

• The assumed bearish price target for News is $26.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of News'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 $45.0, and the most bearish reporting a price target of just $26.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $9.0 billion, earnings will come to $634.2 million, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of $29.88, the bearish analyst price target of $26.5 is 12.8% 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.