Bundling And Franchise Demand Will Drive Long Term Margin Expansion For This Undervalued Streamer

Catalysts

About Starz Entertainment

Starz Entertainment operates a premium streaming and linear network focused on original series and movie content for women and underrepresented audiences.

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

• Accelerating shift to owning at least half of the original slate, including Fightland and other new franchises, should structurally lower per episode costs while unlocking incremental international licensing packages, supporting higher revenue and expanding adjusted OIBDA margins toward the 20 percent target.
• Repositioning international exposure from capital intensive operations to stable, multi year licensing arrangements, as demonstrated by the new Bell Canada deal, is expected to create higher quality recurring revenue with minimal incremental cost, improving free cash flow conversion and helping delever the balance sheet.
• Rising global demand for premium, franchise driven storytelling around established universes like Outlander, Power and Spartacus is driving record OTT engagement and subscriber growth, which should support sustained top line expansion and operating leverage as content amortization moderates.
• Industry consolidation and the pivot by large platforms toward bundling create an opportunity for Starz, already one of the most bundled services on Amazon and Hulu, to take pricing alongside larger streamers while benefitting from lower churn and higher lifetime value, lifting revenue per user and net margins.
• Growing consumer adoption of complementary streaming services to broaden choice beyond general entertainment platforms, combined with Starz focus on women and underrepresented audiences, positions the brand as a must have add on that can underpin steady OTT subscriber gains and drive earnings growth as marketing and tech costs scale efficiently.

Assumptions

This narrative explores a more optimistic perspective on Starz Entertainment 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 Starz Entertainment's revenue will remain fairly flat over the next 3 years.
• The bullish analysts are not forecasting that Starz Entertainment will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Starz Entertainment's profit margin will increase from -21.3% to the average US Entertainment industry of 10.3% in 3 years.
• If Starz Entertainment's profit margin were to converge on the industry average, you could expect earnings to reach $136.4 million (and earnings per share of $8.11) by about December 2028, up from $-280.9 million today.
• 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 6.7x on those 2028 earnings, up from -0.7x today. This future PE is lower than the current PE for the US Entertainment industry at 21.8x.
• The bullish analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long-term shift toward bundled, broad-based streaming platforms could reduce Starz visibility as a complementary add-on service. This could make it harder to maintain organic subscriber acquisition as partners consolidate and reconfigure their offerings, which would pressure OTT revenue growth over time.
• Industry wide content inflation and the need to keep launching tentpole franchises to sustain engagement may force Starz to keep spending aggressively on originals even as it attempts to de age the slate. This could limit the expected decline in annual cash content spend and constrain margin expansion and net earnings improvement.
• The strategic pivot from operating international services to relying on fixed licensing arrangements, such as the Bell Canada deal, creates a more stable but less scalable revenue model in key territories. This could cap upside from global subscriber growth and slow long-term top line expansion.
• Plans to pursue M&A to add AVOD and linear assets introduce execution and integration risk in a highly leveraged sector. Any missteps in transitioning acquired networks from linear to digital could increase leverage and interest costs and delay the targeted improvement in net margins and free cash flow.
• The business remains in a cash flow transition phase with intentionally choppy content payment timing and elevated leverage at 3.4 times. Any macro slowdown, weaker than expected slate performance or delay in normalizing cash content spend could impede deleveraging efforts and suppress earnings and unlevered free cash flow into 2027.

Valuation

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

• The assumed bullish price target for Starz Entertainment is $37.92, which represents up to two standard deviations above the consensus price target of $19.38. This valuation is based on what can be assumed as the expectations of Starz Entertainment'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 $39.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $136.4 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $11.85, the analyst price target of $37.92 is 68.8% 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.